Thesis - Private Sector Participation in Roads Development Planning and Management Issues

PRIVATE SECTOR
PARTICIPATION IN ROADS
DEVELOPMENT:
PLANNING AND MANAGEMENT
ISSUES
A THESIS SUBMITTED TO
THE MAHARAJA SAYAJIRAO UNIVERSITY OF
BARODA
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
IN MANAGEMENT STUDIES
BY
SATISH PANDURANG KARVEKAR
GUIDE:
DR. AMITA S. KANTAWALA
FACULTY OF MANAGEMENT STUDIES

THE M.S. UNIVERSITY OF BARODA
VADODARA
(GUJARAT STATE, INDIA)
JULY 2008
A SUMMARY OF THE THESIS
tv.
PRIVATE SECTOR PARTICIPATION
IN ROADS DEVELOPMENT:
ISSUES
BARODA
FOR THE DEGREE OF
BY
GUIDE:
II//2.
VADODARA
JULY 2008
A SUMMARY OF THE THESIS
PRIVATE SECTOR PARTICIPATION

IN ROADS DEVELOPMENT:
ISSUES
BARODA
FOR THE DEGREE OF
BY
GUIDE:

VADODARA
JULY 2008
SUMMARY OF THESIS
i) INTRODUCTION AND RATIONALE:
Of late, Indian road sector has seen overt divergence from its traditional public sector
produced delivery system to very new approach of Public Private Partnership
conceding resource crunch to meet with the enormous need for the investment in the
sector. Under Public Private Partnership (PPP), the private sector builds up the facility
and retains assets with him for maintenance and collection of tolls for agreed period
of time. The agreement is done for recovering of investments with returns as per type
of regulation adopted in agreement. These agreements are called concession
agreements which allow either agreed rate of return on investment or whatever return
is attained by investor within agreed term subject to capping on toll levels. In such
cases, the competition in the field is not practical since duplication of such facility on
rivalry is ruinous and hence by virtue of concession agreement the investor’s
interests are secured. Installation and operations of public utilities by private investors
have been practiced by European countries since early 1900s and the probable
monopolistic exploitation of users was controlled by Governments using regulations.
The economists like Chadwick and Demsetz advocated market exposure to this
regulated concession awarding practices in the public interest observing sinister
outcome of regulations sans open competition in those days. Hence, competition for
the field was prescribed by the economists and this is the precursor of above said
concession awarding for roads under PPP in India. Under this background, this study
is framed to inquire in to the road sector in India; the main agencies of the delivery
system; the policy shift from public provision to various levels of Private Sector
Participation (PSP) including the financially dependent Public Private Partnership
approach; international experience on various levels of PSP including PPP; case
studies of selected toll projects in India for planning and management of such
projects; the user’s perspective in overall framework and interrogation of users for
their preferences.
As far as Indian scenario is concerned, Government has recognized importance of

National Highways (NH) and has focused policies and investments in this segment.
Government recognizes that development of this segment of road can not wait for
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adequacy of budgetary allocations. A mega investment plan amounting Rs. 2,20,000
crores is taken up by Indian Government under National Highway Development
Project (NHDP) since last one decade supported with dedicated cess on petrol and
diesel through specialized agency namely National Highway Authority of India
(NHAI). Knowing the paucity of public funds, it is inevitably envisaged by Indian
Government to attempt the route of PPP for development of National Highways on
very large scale in the Eleventh Five Year Plan Period (2007-2012). A huge
investment of Rs. 87,000 crores is anticipated from private sector through PPP route
for development of NH segment under ambitious NHDP during Eleventh Five Year
Plan. This is unprecedented and is almost three times of actual total expenditure on
NHDP during Tenth Five Year Plan including all sources. The PPP route is also going
to be major way of developing important State Highways. But roads being perceived
as public goods, development and operations of road facility using private
investments ripple many issues at planning (at project formulation level) and
management (at project operation level) stages. These are issues mainly related to
commercial viability of investment and public acceptance of such projects and are
covered in this study.
ii) OBJECTIVES OF THE STUDY:
The overall objective of this study is to bring out planning and management issues to
promote sustainable Private Sector Participation (PSP) in roads development and
understand factors affecting willingness to pay ( or not to pay) for using the roads.
Precisely the objectives are:
i) To inquire into the status of prevalent practices with reference to road facility
creation and financing of the same through international experience.
ii) To inquire into the prevalent views with reference to control of road facility as
a public good and methods of ownership, transfer of ownership, viability of
projects with the help of literature review.
iii) To understand the status of road development in India , the urgent need for
road development, the causes for private sector participation and regulatory
development for the same.
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iv) To identify present level of PSP (Private sector participation) and scope for the
same in roads development.
v) To identify issues related to PSP at project formulation level and management
level based upon case studies.
vi) To inquire into ‘Willingness To Pay’ for use of road facility.
vii) To find out measures to promote sustainable PSP in roads development and to
understand factors affecting willingness to pay for using the roads.
iii) RESEARCH DESIGN, METHOD OF ANALYSIS AND SOURCES

OF DATA:
Since a national level highway programme (NHDP) is already underway in India, the
implementation of this programme, policy reforms and various agreements in vogue
for PPP route of private sector participation are providing opportunity to study the
PSP related issues for the road sector. The NH being commercially important for
nation and being trend setter for development of road sector, study of this segment has
been emphasized as compared to remaining categories. The research work is designed
to cover the planning and implementation of NHDP at programme level keeping in
view international experience in taking up such programmes. The library work and
internet searches helped in gathering relevant information on this subject matter.
However, no text books on comprehensive studies of Private Sector Participation in
Roads are available for ready reference. The research work also encompasses project
level study of selected case studies under PPP route in India. The user’s preferences in
terms of willingness to pay are inquired conducting preliminary surveys for
Willingness To Pay.
iii).l Selection of Case Studies:
The selection of case studies from projects implemented in India on PPP route is
based on two basic criterions. Hence, cases from both of these categories are selected
from growing population of PPP projects. Knowing the fact that these projects have
come into operations from around year 1999-2000, the tenure of toll operations have
been seven to eight years only. From the limited population of PPP projects, two
projects on State Highways and two projects on National Highways are selected
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which also represented Price Cap regulation and Rate of Return regulation. The
selected case studies are:
1. Construction Of Four Lane Road Over Bridge In Lieu Of Level Crossing Near
Village Chalthan On NH N0.-8 in Gujarat State (Chalthan project)
2. Construction of Delhi -NOIDA Toll Bridge in NOIDA (UP State)- IL&FS
project ( NOIDA Project)
3. Construction Of Four Lane Vadodara-'Halol Road SH No.-87 with access
control divided carriage and Service roads km 8/300 to 40/00 in Gujarat State-
IL&FS project (Vadodara- Halol project)
4. Construction Of Additional Two Lane Bridge Across River Narmada With
Approaches onNH N0.-8 km 192/0 to 198/0 in Gujarat State (NICE project)
Keeping the objectives of study in view, the scope of case studies include aspects of
project formulation that encompasses - basis of project selection, actual site
conditions, decision for fixing toll rates, derivation of toll period, types of concession
regulation adopted in framing agreement, traffic characteristics for planning level
issues. The study of actual operational part of concession agreement is relevant for
understanding of management issues. The operational part is most important to know
about the robustness of concession agreement in inviting and protecting private and
public interests. The audited financial results of companies are found useful to
describe commercial viability of project. The project details, concession agreements
and operational details like toll revenues and expenses were gathered from offices of
concessionaires and some details are availed from internet. Also, relevant details are
traced from Government offices.
iii).2 Preliminary Survey for Willingness to Pay:
Regarding primary data, Willingness To Pay (WTP) surveys are conducted on users
of one of the case studies. The samples are collected from population of Cars and
Trucks only to represent passenger movement and goods movement respectively.
Practically the surveys for cars are done on toll road itself. For trucks, looking to the
limited decision making capacity of truck drivers in choosing toll roads versus free
roads and communication problems with truck drivers, it was preferred to make
personal dialogue in the offices of truck owners/operators (which are located near
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Golden Chokdi near entrance point of Vadodara- Halol Toll Road) in presence of
truck drivers. Looking to the sensitivity of issue, mailing or telephonic interviews
were avoided for gathering primary data collection.
The primary data collected from field survey for Willingness To Pay is statistically
analyzed using linear multiple regression model. The results are tested for goodness
of fit (coefficient of determination, adjusted R2) and significance of individual
coefficients of regression. An analysis of variance (ANOVA) technique provides F-
test which is used herewith to verify overall significance of the model.
iv) SCHEME OF CHAPTERS:
The course of intended work basically maneuvers around programme level private
sector participation for NHDP and some PPP project specific details leading to answer
important questions like - what is really changed delivery system for highways and
how effective it is in enhancing private sector participation in development of roads,
what are the basic issues of private interest and public interest to be equated in
designing a monopolistic concession etc. The actual stream of chapters is arranged as
below.
Chapter-1 is encircling study back ground justifying rationale for taking up this
study. The study framework is derived and objectives of study are narrated with
methodology.
Chapter-H is encompassing relevant literature review for exploring the area of

study.
Chapter-HI is basically related to study of spectrum of Private Sector Participation

and understanding of conceptual structure of concession for roads taking help of
international experience.
Chapter-IV presents the development of National Highways in India through

various agencies and the issues related to planning and management of National
Highways Development Project (NHDP).
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Chapter-V discusses PPP case studies of highway projects executed under private
sector participation in India.
Chapter-VI discusses user’s preference in tolling a highway after developing it for

present and future needs. A field survey for cars and trucks is conducted to understand
the issues related to willingness to pay (WTP) for passenger traffic and commercial
goods traffic respectively.
Chapter-VII presents the conclusions derived based on the detailed study. The
issues emerging out at planning and management stage are studied and listed for
policy implications.
v) CONCLUSIONS AND SUGGESTIONS
The study is made to gather the planning and management issues in undertaking PSP
in general and PPP in specific. The findings and suggestions based on conclusions are
presented hereunder. It is required to mention that planning issues are reflected in
managing the projects and management issues basically stem out of planning aspects
or they have remedies in planning of new projects. Hence, delineation of planning and
management issues in isolation is not preferred however, significant planning issues
are specified as planning issues in the course of study. The conclusions and
suggestions are summarized from study in Chapter-II to VI and are presented below.
1. The review of international literature brings in light that PSP or its financially
depending format of PPP is not a new paradigm for supply of roads. The
private sector had been developer and provider of this utility on its own
initiative which saw demise on the eve of nationalization of roads.
2. The bitterest fact to be concluded from review of UK and US experience of
private initiative for roads development is that any state administration can be
safely assumed to be strongest competitor with coercive power and if not
satisfied, can cause demise of PSP. The present red carpet welcome from
Government needs careful interaction while dealing on public utilities like
roads.
3. The unprecedented level of private investment envisaged by Government of
India seems to be most difficult task as the international experience of such
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nation wide programme is discouraging and suggests limited scope (about 10
% of total investment in important network) for privately financed toll roads.
4. The Europe has remained pioneer in awarding concession to develop and
operate public utilities and it has imparted many innovations other than PPP
for better private sector participation. The theme of these innovations is more
trust on contractors (Outsourcing); allowing contractors to participate in
development process before award of work (Early Contractor Involvement);
emphasize on value based evaluation of bids instead of awarding works based
on offer for lowest bid (Best Value Procurement); instead of prescribing for
predetermined civil work, focusing on performance standards; the long term
planning perspective; prequalifying contractors for specific need of a job etc.
However, the outsourcing of all activities including core engineering functions
in India is suggested to be taken up with due care. In a wide country like India,
any loss in engineering capability among Government engineers due to
continued outsourcing clubbed with thinning of strength of public bodies can
mean future generations of Government engineers not even capable of
evaluating outsourcing proposals. Hence, it is strongly suggested that
outsourcing of core engineering functions shall not lead to loss of engineering
capabilities in Government engineers over a period of time. Hence,
outsourcing and Government way of execution shall co-exist side by side
which may be competitive.
5. Regarding European approach to concessions for new construction and
maintenance, the small size of the nation is allowing them to take ample time
in preparing the project case and reaching to award stage. However, by any
standards, the inordinate time taken for awarding the concessions in Portugal
and Spain is avoidable.
6. The pendulum of nationalization and then private participation is noticed in
case of countries like Portugal, France, and Spain which raises concern over
sustainability of private operations over long period of time. The changing
priorities for the sector seems responsible for such treatment to this public
utility. This is note worthy for Indian perspective where private sector is being
invited on all fronts assuring long standing partnerships.
7. The Public-Private Comparator (PPC) is most attractive feature practiced by
UK for efficient screening of private investment vis-a-vis public investment.
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The working of PPC requires good hold over cost implications of various
options and it is well managed by UK.
8. The Latin America & Caribbean countries have seen alarming rate of
renegotiation and some cancellation of concessions awarded for public
utilities. The concern for price and quality standards as mentioned by Alfred
Marshall is found not addressed while negotiating for award of concession and
while taking up renegotiation.
9. The experience of toll road programme in Mexico is most eye-catching for
Indian perspective. The present Mexican programme is very much similar to
PPP format being used by NHAI. The apathy for reliable traffic count and
improper preparation and evaluation of financial case of project are the aspects
of earlier Mexican programme quite relevant for present Indian practice. The
features. like Administration Trust for proper accounting of construction
process, formation of corruption proof technical committee for supervision
and setting up of Issuance Trust for proper accounting of operations (tolling
and maintenance) are the strongholds of new approach to toll roads in Mexico
and are worth admitting in Indian NHDP.
10. The Chinese mega project for expressways is good case for securitization of
tolling operations. The major aspect is, instead of BOT type of PPP project,
State supports major initial investment that is subsequently recovered through
proceeds of initial public offer or securitization. The public support to
investment through stock market is good concept to secure public acceptance
of toll operations.
11. The Indian roads are quantitatively leading the world chart but it has no place
in international comparative for superior roads. The National Highways are
superior category of roads in India and carry 40% of road traffic though they
are only 2% of total road network. The NH segment has however seen
resource crunch since atleast last two (Ninth and Tenth) Five Year Plans
wherein NH stock has doubled but central funding has not kept pace with even
routine maintenance requirements. Hence, almost one third of NH stock is
found of village road standards.
12. Despite rhetoric support to PPP route, NHAI has not really realized more than
10% of private sector investment in recently completed Golden Quadrilateral
(GQ) under Phase-I. The GQ is the only portion completed by NHAI under
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NHDP so far in last eight years. This private investment has been found on
piecemeal basis (like Spain and Mexico) where commercial viability was
evident and hence, there is faster development on busy corridor like National
Highway N0.-8 (Delhi- Mumbai corridor). But on such busy corridor also,
development has been on piecemeal basis. The most striking fact is famous
Golden Quadrilateral network under the Phase-I took more than double time
for completion with substantial cost overrun. The GQ was to be implemented
under established and favourable conditions whereas now Phase-II is to be
implemented under greenfield conditions. Despite , slow progress in Phase-I
and II, the original scope of 14234 km under Phase-I and II is expanded to
51834 km that is almost four times expansion of NHDP. The expansion of
NHDP is not to cost Government much as all these added works are declared
to be taken up on BOT basis. The new targeted year of NHDP is 2015 which
is found unrealistic as analyzed based on progress so far. Also, the chances of
realizing so many works on BOT basis are dim in want of existence of
financial framework and Working Group of Eleventh Plan itself suggest scope
for cash contract type of execution that was employed by NHAI in last eight
years.
13. The Task Force on infrastructure (1998) had anticipated financing of NHDP
based on access to long term institutional finance like commercial banks,
insurance and provident funds which were supposed to have matching terms
of repayment with road project and were in need of stable source of returns for
long time. The repayment to such institution was estimated to come from cess
and other user charges (including tolls) and in this concept the private sector
equity was estimated only around 10%. In reality, no such leverage is enabled
either by NHAI or using PPP route through private investors. So far the users
charges collected on current receipt basis are directly employed to pay the
capital expenditure of contractors under cash contracts. This mechanism has
not produced sufficient output where deficient executive capacity of NHAI has
also played major role. Since the production of tollable four lane got slow, it
directly affected the inflow of toll income and hence the current receipt under
cess got under severe pressure to see the cess reaching level ofRs. 2.0 per liter
of petrol and diesel from Re. 1.0 within first eight years of NHDP.
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14. If the concept of Task Force(1998) is extended, a supportive financial market
for financing and refinancing of such investment leveraged on current receipts
of project is required (like primary and secondary mortgage markets in
housing loans) irrespective of type of player involved i.e. public player like
NHAI or private player like individual BOT concessionaire. The international
experience suggests that NHAI should create many public concession
companies to tap long term resources (e.g. Insurance and Provident Funds)
with the help of GOI based on leverage on project revenues (and cess support).
For example France has done this and divested public investment at proper
stage from such toll companies. The pooling of NHDP inflow at national or
such large scale can help in ascertaining financial viability of long term
finance gathered from financial institutions. Otherwise scattered type of
present PPP will be limited to attractive stretches and are susceptible to
viability concern (as found in case of Mexico and Spain). Alternatively, large
private consortium if handles many stretches bundled from viability
perspective, the overall spread of PPP may get penetration into greenfield
conditions. This level of private financing of highways may require foreign
investment which was arranged by China by linking the PPP projects to capital
market. All these mean, basically creation of proper financial market which
was contemplated by Task Force (1998) in the terms of operation of IDFC is
yet unattended by Government and it needs priority. Otherwise, the present
scenario is limited to awarding concession for attractive stretches on Build-
Operate -Transfer basis and NHAI awarding cash contracts to the maximum
extent possible under given public resources.
15. NHAI is drawing satisfaction by executing cash contracts using outsourcing
type of consultancy services at the cost of removal of State PWD from
execution of such projects. But the outcome is not encouraging for
continuation of this approach. For speedier implementation of NHDP either on
PPP route or by cash contracts, State PWD is felt proper partner in
development of NH. It is felt that NHAI should concentrate on PPP route
using public concession companies like France and shall invite private sector
competition for the field of NH segment. The cash contracts shall be left to
traditional players like State PWDs. If the supervision is to be outsourced then
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State PWDs shall be inspired to compete with private consultants for
supervisory job so that this valuable public agency is put to task.
16. In fact whole approach to NHDP tends not to expose the field to the market at
larger scale. The PPP route envisaged through MCA (Model Concession
Agreement) is an attempt to regulate the natural monopoly conferred upon to
BOX concessionaire to control superfluous profits but it has no jurisdiction to
foster PPP by linking the project with market. The MCA provides grant
support in BOT projects and calls it leveraging over public funds (in terms of
grant support) to attract private investments on project basis. But even at
project level, leveraging on private equity fimds or toll revenue to facilitate
cheaper debt resources is not attended in this MCA. Hence, the approach for
PPP is a piecemeal approach that can not meet expected investments under
NHDP. If the NHDP is going to depend upon budgetary allocations like public
financing, the sustainability of NHDP and NHAI is vulnerable. The tenure of
NHDP so far is envisaged to be only fifteen years which is very short as
compared to US and China who required two decades or more to construct the
system of superior roads. Hence, NHDP can be taken up cautiously applying
corridor approach or package of many routes so that field on wider scale is
exposed to market forces and competition for field is materialized in case of
natural monopoly conditions.
17. The NHDP is in fact good ground for inducing private sector participation in
various categories of roads. The local bodies and State PWDs shall be made
partner in this process Who can carry lessons to their jurisdiction of remaining
categories of roads. Considering importance of State PWD in fostering PPP at
State level (for State roads), NHAI shall atleast involve State PWDs in their
set up (may be on loan service basis) so the PPP at NH level gets sound local
support and State PWDs get valuable exposure to NH PPP which in turn can
help PWDs to develop State roads in convergence with NH.
18. Present delivery system under non PPP route is also not efficient and need
project level careful estimation and design of projects through responsible
consultants if outsourcing is opted for. The modus operandi of NHAI under
outsourcing based approach has worse problems as compared to State PWDs
since the present consultancy firms are not really found working satisfactorily.
The duress component is still maintained in non PPP mode of execution as
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evident from analysis of delivery system. It is hereby suggested that the
consultants shall be made responsible in their performance for effective
outcome in non PPP route which is necessitated from evaluation of their
performance by CAG auditors. A system of retention money for atleast five
years or lien on remunerations of consultants from other projects shall be
embedded in contracts with consultants so that financial penalties can be
imposed and realized even after completion of project.
19. At project level, an attempt is made by Government to make PPP more viable
based on provisions of MCA e.g. staggering the investment for six lanning
with a gap of around ten years, State support agreements for not creating
competing routes, acceptance of subsistence level of revenue and availability
of shortfall loans, traffic guarantee for traffic volume on a decided point of
time in the concession period, availability of capital grant up to 40%of project
cost to meet construction and O &M cost etc. but user’s recourse is missed as
was asserted by Alfred Marshall. More over, the partial traffic guarantee
embedded in MCA is risky to rely upon by lenders since it is merely assuring
traffic as per predecided growth rate on specified point of time and
compensation is not in cash but converted in to further extension of liability by
extending the concession period. The Mexican experience of first wave of toll
roads alarms lenders for not to overlook own assessment of traffic worthiness
of individual projects and suggests adequate evaluation of financial case
prepared by concessionaire instead of relying upon Government support.
20. As per MCA, bidding is based on least cost to Government, under given fixed
concession period and fixed toll rates. Hence the concessionaire now faces
not only price capping but also faces to some extent revenue capping which
are regulations embedded to control superfluous profit from BOT operations.
But in case of lower traffic conditions, the MCA only offers shortfall loans
under unattractive stipulations. The stipulated traffic guarantee is not really
compensation as it is converted in to extension of concession period which
could ultimately mean winner’s curse. Hence, in absence of any guarantee on
returns, the risky and complicated nature of BOT format embedded in MCA is
not going to lure the private investors despite cost sharing provisions.
21. The BOT projects are only a decade old concept in India which covers many
aspects beyond traditional cash contract projects. However, planning and
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designing of concession agreements have been on line of construction
agreements only. Except recent provision for partial traffic guarantee in MCA,
the very important aspect of traffic is most neglected by planners so far.
Hence, neither reliable past records are committed by Government or future
traffic is forecasted by Government as a commitment. All the four case studies
suggest that traffic after the starting of toll operations hold the key for success
of BOT projects.
22. The case study of Chalthan ROB is significant to explain perils of tolling local
traffic. Though the local traffic is now regarded as toll free under recent MCA,
the issue of estimating tollable traffic is yet unresolved. In absence of reliable
traffic database, the tollable traffic is need of guarantee atleast during Ramp
Up period. Otherwise, BOT project is turning up into a speculation business
where concessionaire has no capacity to influence the demand. In fact good
database for tollable traffic can be helpful in negotiating BOT projects at
award stage.
23. The Chalthan project also suggests confirming toll booth locations aprior with
necessary understanding of intermix of local traffic with tollable traffic. The
planners shall have full understanding of alternative location of toll plaza so
that issues arising from location of toll plaza can be sorted out smoothly.
24. The claims arisen due to issue of local traffic in Chalthan ROB emphasized
requirement of accounting and monitoring of actual project cost and actual toll
revenues though it was a price capped BOT project. Even recent MCA has not
given importance to these issues with an understanding that it is all related to
profitability of concessionaire and hence is not of public concern. These
aspects are most vital in Rate of Return regulation based PPP projects but has
relevance for Price Cap regulation also when issues of refinancing, re
auctioning and claims are to be resolved. Also, hold over such details can help
Government in renegotiating events.
25. The BOOT projects jointly sponsored by IL&FS and Government for NOIDA
toll bridge and Vadodara- Halol road are excellent cases of minute detailing of
• viability concern under Rate of Return regulation. The most striking planning
issue in formulating these two projects is, avoidance of open competition for
the field. Since competition in the field in road sector is not advisable,
efficient concession can be awarded only through competition for the field. In
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both cases, it is unsolicited proposals being awarded the field and two
diverging representatives of public (Le. Government) and private concern (i.e.
IL&FS) are made partner of commercial interest in project. This is most
debatable partnership where private concern is most likely to overshadow the
public concern in terms of increasing toll rates beyond inflationary limits and
no user’s recourse in case of reduced service standards. On the other hand,
IL&FS played multiple roles of- Sponsor, Concessionaire, and to certain
extent lenders. The worries of Demsetz in regulating public utilities are
relevant in these cases where Alfred Marshall’s proposal to focus prices and
service standards is ignored for avoiding public investment.
26. Both of these projects have met with drastically poor traffic as compared to
own assessment and the cost of overinvestment is passed on to the ultimate
users. The uncapped definition of project cost was infact loose comer
unregulated under partnership of Government.
27. Both cases underwent massive restructuring to bail out respective companies
from doldrums conditions. However, Government could not extract any
benefit in this process for public concern owing to its partnership in
commercial operations.
28. In both cases, users are charged excessive tolls by annual increments (beyond
inflation based formulae provided in agreement) just to reduce the deficit in
return. The benefits to users are however never compared with tolls being
levied during operation period.
29. Due to assured returns, Government carries most of the risk in both the cases.
Both the cases in fact carry explicit Government guarantee for debts raised and
hence basically all funds are attracted on Sovereign eligibility. Thus essence of
PPP is not served. Though both cases started with modest 30% of equity, the
operating losses forced the owners to infuse more equity within operation of
around five years to the tune of 50% or more and thus it was failure of
financial plan to model a replicable PPP project on pioneer basis.
30. As far as planning of Vadodara- Halol project is concerned, the agreement has
provided only four lane facility whereas the stretch is functioning as a
interstate highway between Vadodara- Delhi, Vadodara- Indore and
Vadodara- Banswada. Hence, the future problem with this limited capacity of
project road is going to hamper project economics.
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31. As an academic suggestion, it is felt that Rate of Return regulation with
assured returns at 20% associated with wholesome Sovereign guarantee is not
in public interest and hence both the agreements should be terminated
immediately. The concession agreement requires paying back concessionaire’s
outstanding project cost at the time of termination. In fact Government missed
the chance of re-awarding the concession for both the cases when these
projects underwent financial restructuring. Academic exercise of estimating
NPV of future cash flow suggests that it is possible to terminate both the
project agreements and pay back concessionaire from proceeds of awarding
concession to other concessionaire through open market competition. Further
it is also found possible to demand rebate on toll rate at the time of auctioning
as a precondition of new agreement which shall not be on Rate of Return
regulation.
32. The case study of Narmada bridge is NH project with Price Cap regulation.
Due to overestimation of traffic and huge debt servicing cost as compared to
toll income, occurrence of Ramp Up period seems generic for toll projects.
However, this aspect is consistently neglected in all four cases by Government
that could affect maintenance capability of concessionaire. Hence either
reserve for maintenance shall be ensured or appropriate designing of project
specific financial base case is suggested to mitigate the viability problem The
preparation and acceptance of appropriate financial base case will enable
planners to stipulate financial covenants (e.g. Debt/ Equity ratio during
construction and operation period) and will facilitate loading and unloading of
equity funds as the cash flow prospers. This suggestion of emphasizing
financial covenants is aimed at reducing financial cost of project and to
mitigate problems of Ramp Up period.
33. The salient feature of Narmada bridge case study is planning issue of tolling
the existing bridge under the concession awarded for construction of adjoining
new bridge. The users are found aware of tolling purpose and any illogical
tolling is resisted by mostly local users. The problem of tolling existing bridge
is acute here because the existing bridge is having structural defect leading to
often closure for traffic which renders four lane facility into two lane. In
absence of user’s recourse, users pay tolls for four lanning capacity though
they have to undergo long queue to cross the Narmada river. This is the fact
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leading to conclusion that the concession agreement shall be flexible to
accommodate issue of closure of old bridge either by reduction in toll or by re
auctioning the concession for accommodating the repairs to old bridge or
construction of new bridge.
34. Another planning issue of Narmada case study which is in need of
renegotiation or re-awarding is non availability of category of Multi-axle
vehicles and tolling of them at the rate of six wheel trucks. NICE has claimed
that introduction of ten wheel trucks and multi-axle vehicles have reduced the
total population of vehicles under the category of trucks. The issue is pending
with Steering Group but such issues are most relevant when technology
changes fast and nomenclature used in agreement affects the viability of
project. The problem with Price Cap based concession agreement used for
NICE or even MCA is ignorance of financial aspects of project. It affects the
viability of project when renegotiation becomes impossible in want of
agreeable past financial data that is never monitored by Government. All such
operational and management problems surfacing due to flaws in planning or
changing perspective hints at constitution of flexible agreement that is only
possible if returns demanded in the bid at award stage are evaluated at bidding
stage and are monitored during operations which are missing for Price Cap
regulation cases.
35. NICE has faced operational problems like regular delay in revising toll rates
each year, shortage of coins for collecting odd figure fees, toll evasion due to
formation of alternative route circumventing the toll booths. All these
management issues are minimum contribution expected to be sorted out by
Public partner during design stage or atleast during operations instead of
expecting it from private partner for his own viability concern.
36. Looking to the problems with rigid agreement, feasibility of re-auctioning is
verified in case of NICE like exercised for IL&FS cases. But here the aim is to
incorporate cost of new bridge and termination amount payable to NICE in
bidding and then accommodating toll rebates. The projected cash flow suggest
feasibility of such option and hence it is academically suggested to re-auction
concession for this facility with provision for construction of new bridge that
will give opportunity to NICE for relieving if desired or may continue by
16
agreeing new terms arrived at from open competition for re-award of
concession.
The findings from response to WTP survey for car users are summarized as below.
37. The car users were found not ready with perception of savings in VOC or in
time. The car users agree with benefits of toll road like time saving, lower
maintenance higher speed, access control and safety, comfortable journey and
road side amenities. But they have no tangible response that required gathering
response for WTP in three levels (i.e. Highly Acceptable, Acceptable and
OK). This is reflected in mean values for WTP observed. The mean value of
maximum (OK) level of WTP is found Rs. 22.0 to Rs. 24 (std. error =6.8 to
10.6) that is near to actual toll level of Rs. 30 despite myriad arguments for
tolling of road. The same respondents have stated most acceptable toll level of
about Rs. 17.0 to Rs. 19.0 (std. error = 6.3 to 7.6) that is only 60% of
prevailing toll rate. But assured the service standards, scope for good WTP
was evident. Most stunning finding was none has expressed zero tolling for
Vadodara-Halol stretch. The zero tolling was meant to be understood as road
is maintained as per availability of State funds and no early
improvements/widening. On this ground, zero tolling was not favoured even
for existing toll free Halol- Godhra road. The car users were mostly found
coming from Vadodara or Panchmahal district and were thus local people. For
them, the total length ofjourney has improved and that was reflected in above
response. The car users also discussed issue of existing taxation on possessing
and using a car. Need to provide a free road for already prevailing taxes was
discussed and present toll level on Vadodara -Halol road was stated
proportionately higher than Vadodara- Ahmedabad Expressway.
38. As per regression analysis for cars, looking to the reasonable value of adjusted
R2 and extremely good overall significance of regression model, the linear
relationship assumption is found tenable. Thus, the WTP has very simple
relationship with independent variables.
39. Statistical analysis proved existence of positive and remarkable intercept of
about Rs. 24 to Rs. 30 considering all level of WTP. This is most encouraging
17
/'
outcome of this analysis. It simply means, Vadodara- Halol Toll road is worth
paying tolls that too very near to prevailing toll level of Rs. 30.
40. The gap between mean WTP stated by respondents and intercept of regression
model is mainly explained by the toll resistance arising from impact of other
taxes on road sector. This is statistically observed from significance of that
variable in all three levels of WTP.
41. The WTP is found depending on service standards in full length of journey.
The toll free good riding quality of Halol-Godhra road is found helpful in
explaining WTP for Vadodara- Halol Toll road. Another way, the analysis
suggests that any downfall on service standards on remaining leg of journey
hampers the WTP on existing toll road adversely. Practically it can be stated
that a pothole on Halol - Godhra stretch can influence WTP on Vadodara-
Halol Toll road. Hence it is suggested that knowledge of origin-destination of
toll road users shall be given importance and the service standards of
remaining leg (may be tolled or untolled) shall be ensured to the acceptable
level for helping tolling on selected toll road.
The findings from response to WTP survey for truckers are summarized as
below.
42. The truckers are found too annoyed with tolling practices on highways. They
have very clear understanding of savings in VOC due to improved roads. The
stated mean value of perceived savings on Vadodara -Halol road for three axle
trucks is only Rs. 2.17 per km (Rs. 69.44 per one side journey) as compared to
prevailing toll level at Rs. 4.4 per km (Rs. 140.0 per one side journey). Similar
to car users, tolling seems to be accepted by transporters as indispensable
charge on use of facility. But the mean WTP for Vadodara- Halol Toll road is
very low i.e. Rs. 1.93 per km (i.e. Rs. 61.76 per one side journey of project
road). Thus truckers perceive benefits of half of toll being paid on project road
and they have expressed WTP for selected toll road even less than half of
prevailing toll rate. The trucks travel far beyond Vadodara- Halol and hence
any positive or negative experience on this 32 km of small stretch has limited
relevance for them. But any positive or negative experience on remaining huge
length has definite impact on WTP for this project. Since road between
Vadodara- Shamlaji borders has only this alone tolled section, the mean WTP
on toll road is infact covering benefits of remaining contiguous untolled length
also. This is evident from the fact that truckers state per km WTP for full
18
length journey with four lane facility at only Rs.l. 14 that is lower than per km
WTP of Rs.l.93 on Vadodara- Halol road. The some of the reasons are
common with car users. All of the respondents blamed other taxes affecting
WTP. The heavy fixed and variable cost of owning and driving truck on
national or three state permits, tyre renewals, servicing, body work and very
competitive fares on other hand are stated as major hitch to pay this extra
charge. One more intrinsic problem with truckers is stated as, diesel saving is
generally cornered by drivers and maintenance savings is felt reaching to
owners. The overloading and sundries collected for enroute short distance
consignments were told helping many of times. Regarding time saving, there
was no waiting business opportunity at any end stated as a major factor in
underquoting WTP for selected toll road and for foil length improvement.
When business opportunity exists, trucks can not run at speed of 100-120
kilometer per hour and can not travel for more than six hours at a stretch to
take benefits of toll roads. The absorption of tolls in overall business
operations of transporters is not a planning issue here and statistically it has
emerged insignificant too. Overall, the trackers view tolls as an additional tax
imposed in-proportionately to savings. Hence, they are eager to know when
the investments will be recovered resulting into cessation of tolls on all tolled
sections. They are skeptical of tolling policy and demand transparency of
tolling operations. These are all problems related with pricing the facility
without precise estimates of users’ benefits. If the users are the only payers of
PPP project, the WTP can not be expected to match with prevailing toll levels.
Important for planners is, user’s recourse. The transporters have common
experience of inferior treatment at toll plaza and lack of basic amenities on toll
roads after paying heaviest tolls.
43. As per regression analysis, looking to the reasonably good value of adjusted
44. Here the intercept of regression model is positive, statistically significant but
not remarkable (Rs.42) as compared to prevailing toll level of Rs.140 for
selected category of three axle truck. This is only Rs. 1.31 per km as compared
to mean of Rs. 1.93 per km. Overall, statistically significant model for WTP
19
implies more to reduce effect of overall taxation than any enhancement
measures. The variable of perceived savings on selected toll road is not having
strong coefficient that could lead to increase WTP by increasing saving on
selected toll road. Due to survey limitations, many variables are rendered
statistically insignificant or many are yet to be explored which opens scope for
further research. However it emerges from discussions during surveys,
corridor type of hasslefree point to point superior roads for known origin-
destination is one of the solutions to this. At broad policy level, rationalization
of taxes on road sector and tapping externalities for project revenues are also
worth applying measures to address to this issue of lower WTP for trucks.
45. The WTP estimates thus need to take into account many factors beyond
project benefits. It requires time to time review of actual benefits from the
project and from remaining leg of journey to sort out problems with users’
recourse. Alternatively for a given WTP or for given estimate of quantum of
benefits accruing to users due to improvement, the size of project and stages of
investment shall be checked back since the project cost along with traffic
volume are directly deciding the toll levels at present and viability gap shall
be adjusted from other sources (externalities).
vi) SUGGESTION FOR MORE ACCOUNTABLE AND FLEXIBLE

CONCESSION AGREEMENT.
The Chapterwise conclusions and suggestions could be effectively extracted to

suggest that the regulating of public utility like roads is in need of a flexible
concession agreement that can rectify flaws observed in ongoing agreement and
accommodate development of changing perspective. The NH segment and hence
remaining segments of road sector are practicing Price Cap regulation in award of
concession. But these concession agreements are overlooking the financial aspect of
project as the Price Cap regulation is not concerned with viability of project once the
concession is awarded. The Rate of Return type of regulation is rare in road sector but
they impart good lessons for accountability of agreement for viability of commercial
agreements. The lumpy investment in road project can only be made attractive if
periodic re-auctioning is embedded in concession agreement .Of course, it shall
satisfy Demsetz auctioning by exposing to market forces through open competition
20
and it shall accommodate user’s recourse by securing toll rebates in new agreement.
This will be in line with Alfred Marshall’s suggestion for focusing the bids on prices
or service standards rather than on least investment liability to Government. If the
exercise fails to evoke response then ongoing concessionaire shall continue to operate
for remaining term of agreed concession period. More over, in case of successful
bidding, the ongoing concessionaire shall have preemption right to continue under
now improved agreement as derived from best offer. This type of agreement can be
re-awarded during full economic life of original investment and hence transferring
facility to Government at end of concession is avoided for efficient use of asset. Once
the asset is created, such operations will be beyond traditional engineering practices.
Hence it will require good financial market for such firms to operate and finance the
project. Moreover, a regulatory framework will be needed to see that rebidding
occurs at precise point of time under larger perspective of public interest. This is a
major policy recommendation felt noteworthy in the design of concession agreement.
21
CERTIFICATE
This is to certify that the Thesis entitled PRIVATE SECTOR
PARTICIPATION IN ROADS DEVELOPMENT: PLANNING &
MANAGEMENT ISSUES incorporates the results of independent
investigation carried out by Satish P. Karvekar himself and has at no
times been submitted for any other degree of this or any other
university.
KARVEKAR SATISH P. PROF. DR.AMITA S. KANTAWALA.
Candidate Guiding Teacher
Date :\% July 2008.
1
PREFACE
This study of "Private Sector Participation in Roads Development:
Planning and Management Issues" is basically focused to address the
issues of viability of private investments in building and maintaining roads
in India. The genesis of formulation of this study is inspired from practical
experience in this field and from diligent guidance from my guide. The
field explored in this study is new in Indian perspective since BOT projects
are merely decade old for roads in India. The relevant literature is mostly
found from European context and some policy research work is also found
available from World Bank Publications. A humble attempt is made in this
study to inquire and analyze the status of Private Sector Participation in
development of roads at policy level and project level as well with the
help of selected case studies and data available on ongoing National
Highway Development Project (NHDP). The researcher has mainly found
that lumpy investment in toll roads is in need of periodic exposure to
market forces and preparation of detailed financial base case while taking
up road projects on commercial basis is essential to make the projects
marketable. Of course, user's recourse shall be the guiding principle in
planning and managing these traditionally public assets.
it
ACKNOWLEDGEMENT
Revering Lord Shree Ganesha, it is wonderful feeling to express gratitude on

this momentous event of completion of this research work which was
underpinned by numerous persons and organizations who deserve hearty
appreciation for their benevolent gesture.
If I look back, throughout the tenure of this research work it is my noble guide
Dr. Amita S. Kantawala who has stood consistently behind me to see that I
really achieve the goal. Her firm and deep interest in research work related to
practical aspect of pedagogical lessons has been useful to me to understand
the actual practice in correct academic framework. I also thank to learned
members of her kind family who had aspired to see me accomplish this work.
It is my great pleasure to express my grateful thanks to Prof.Dr. G.C.

Maheshwari, Professor, Head of the Department and Dean, Faculty of
Management Studies, M S University of Baroda for his scholarly suggestions
during my course of studies. He has taken parental care of me and provided
help in the progress of my work. The co-operation shown by members of this
faculty is also worth mentioning.
Respectfully to state, there are numerous experts in the field and in the
academics whom I remember at this moment sans enlisting but I carry high
indebtedness for their support.
In my office, right from Honourable Secretary, R&B Department Gandhinagar,

every body has supported me in this noble cause and spared their valuable
time, resources in my favour. It is automatic to remember Shri. Sandeep
Vasava, Chief Engineer (National Highway) Government of Gujarat and Shri.
D.P. Gupta (Retd. Director General) Ministry of Shipping, Road Transport &
Highways, New Delhi for their standing assurance to help out in any
difficulties. My superior Shri Bharatbhai Vasava has been most eager to see
me accomplish this milestone and I can not forget Mr. Suratia in NH Division,
Bharuch who has handled many of my obligations just for respect to academic
iii
work. Additionally, Mr. MJ. Patel (NH Godhra) shall remain in my personal
diary for all that care taken by him.
The candid discussions provided by Shri Sapre (IL&FS) also deserve humble
mention along with co-operation extended by various officials of projects
selected in this study. The truckers and motorists spending time with me with
a hope for change is unforgettable and reminds me of commitment in this
field whenever opportunities seen.
1 sincerely thank Alma Mater, School of Planning, CEPT, Ahmedabad for

infusing multidisciplinary research orientation during my Post Graduation
study and holy culture of Swadhaya Pariwar who enabled me to take up
academic work despite full involvement in practical field of Civil Engineering.
I am sincerely thankful to my parents and family members who did bear with
me for not giving them adequate time during tenure of this study. The
personal feelings for my family friend Bhupesh are natural at this occasion. My
wife and my daughters must be expecting relief after passing through a long
tenure of stress that they tried to take away from me.
I however admit that what ever deficiencies might have remained in any part
of this process and the Thesis, 1 assume personal responsibility for that.
SATISH PANDURANG KARVEKAR.
IV
TABLE OF CONTENTS
Chapter No. Details Page
No.
Certificate i
Preface ii
Acknowledgement iii-iv
Contents v-vi
List of Tables vii-x
List of Figures xi
Acronyms xii-xiv
CHAPTER-I INTRODUCTION 1-17

1.1 Back Ground of Study 2-6
1.2 Rationale of Study 6-9
1.3 Objectives of Study 9-10
1.4 Scope of Study, Research Design and Sources of 10-13
Data
1.5 Scheme of Chapters 13-15
CHAPTER-II REVIEW OF LITERATURE 18-69

2.1 Introduction 20-22
2.2 History of Road Development and Tolls 22-30
2.3 Evolution of Road Pricing Theories 30-35
2.4 International Experience for PSP Programmes in Road 35-41
Sector
2.5 National Highway Development Project (NHDP) and 41-52
Financing of Indian Highways
2.6 Planning and Management of Toll Roads 52-60
2.7 Willingness to Pay for Toll Roads 60-61
2.8 Conclusions 61-63
CHAPTER-III PRIVATE SECTOR PARTICIPATION: DESIGN OF 70-144

CONCESSION & INTERNATIONAL EXPERIENCE
3.2 Spectrum of PSP 73-76
3.3 Public-Private Partnership: A changing delivery system 76-82
3.4 Public-Private Partnership and Concession Design 82-96
3.5 International Experience for PSP Programmes- European 96-111
Innovations in Contracting Practices Untapped In India
3.6 International Experience for PSP Programmes on 111-135
Concessions
CHAPTER-IV DEVELOPMENT OF NATIONAL HIGHWAYS IN 145-241
INDIA: AGENCIES AND PROGRAMME
4.2 Present Road Network in India 148-151
4.3 National Highways in India 151-152
4.4 Qualitative Aspect of Indian National Highways 152-154
4.5 Genesis of National Highways Development Project (NHDP) 154-164
4.6 Dedicated Cess Funds For NHDP 164-166
4.7 Implementation & Financing of NHDP 166-183
4.8 Twin Suppliers of NH Development & Their Convergence 183-212
4.9 Use of Model Concession Agreements for PPP in NH 212-224
V
Segment and Issues
4.10 Approval of PPP Projects by Public Private Partnership 224-232
Appraisal Committee
CHAPTER-V TOLL PROJECTS FOR ROAD SECTOR IN INDIA: 242-416
CASE STUDIES
5.1 Introduction 244
SECTION-I BACKGROUND FOR CASE STUDIES
5.2 Design of Concessions and Bidding Criteria for 245-252
BOT Projects
5.3 Selection of BOT Projects for Case Study 252-254
SECTION-II DISCUSSION AND ANALYSIS OF
CASE STUDIES
5.4 CASE-1 Chalthan - Road Over Bridge 254-271
5.5 CASE-2 NOIDA Bridge 271-323
5.6 CASE-3 Vadodara -Halol Road 324-361
5.7 CASE-4 NICE (NarmadaBridge) 362-395
SECTION-III PRIVATE PROJECT FINANCING
ASPECTS
5.8 Private Project Financing Aspects in Concession 395-398
Designs
CHAPTER-VI ROAD PRICING AND WILLINGNESS TO PAY 417-479
TOLLS
6.1 Introduction 419
SECTION-I THEORETICAL BACKGROUND
6.2 Theoretical Aspects of Road Pricing and Willingness to Pay 419-424
6.3 Issues of Sectoral Taxes on Indian Road Sector 424-428
6.4 Tolling Legislation in India 428-431
6.5 BOT Projects and Application of Tolls 431-434
SECTION-II EMPIRICAL ANALYSIS
6.6 Field Survey for Identifying Issues Related To WTP of Road 435-471
Users
6.7 Conclusion 471-477
CHAPTER-VII CONCLUSIONS AND SUGGESTIONS 480-504
7.1 CONCLUSIONS AND SUGGESTIONS 481-503
7.2 SUGGESTION FOR MORE ACCOUNTABLE 504
AND FLEXIBLE CONCESSION AGREEMENT.
BIBLIOGRAPHY 505-518
APPENDIX-1 519-522
APPENDIX-2 523-527
APPENDIX-3 528
APPENDIX-4 529
VI
List of Tables
Table No. Details Page
No.
Table:I-l Present Road Network in India 3
Table:I-2 Status of Roads under Varying Economic Conditions 7
Table'll-1 Road Pricing Theories over the Time 32
Table:III-l Identification and Allocation of Risk in Designing 92
Concessions as Recommended by World Bank
Table:III-2 Regional Road Projects Planned or Completed since 1985 by 95
Contract Type (1985-2004)
Table: III-3 Europe Road Network & Concession of Roads (selected 97
countries)
Table:III-4A Shrinkage in Role of Highway Agency in Europe, US and 105
Canada
Table:III-4B Shrinkage in Role of Highway Agency in Europe and 105
Canada
Table:III-5 Risk allocations Strategy under French Concessions 116
Table:III-6 Spanish Toll Road & Toll Free Road Development 119
Table:III-7 Procurement of PPP Road Projects in Spain: Average 120
Timescales Pre-Tender Phase
Table:III-8:A Contract Features and the Incidence of Renegotiations for 123
Infrastructure Concessions in Latin America and the
Caribbean, Mid-1980s to 2000
Table:III-8:B Common Outcomes of the Renegotiation Process for 124
Infrastructure Concessions in Latin America and the
Caribbean, Mid-1980s to 2000
Table:III-9 Mexican Toll Programme Corrections 130
Table:III-10 Chinese Share in ESCAPE Private Toil Road Investments 132
Table: III-ll Chinese Expressway Constructions 135
Table:IV-l Present Road network in India 149
Table: IV-2 International Comparison of Road Network as in 2004 for 150
Total Road Network
Table: IV-3 NH Stock Additions in India 151
Table: IV-4 Qualitative Aspect of NH Stock in India 152
Table: IV-5 International Comparison of Expressways as in 2004 & % of 153
Total Road Network
Table: IV-6 Details of Four Lane and above National Highways in 158
various States of India (2006)
Table: IV-7 Proposed Cost of Three Proposals (NHAI Estimates 1998 160
Basis)
Table: IV-8 Annual Sources of Investment Funds for Funding the NHDP 160
Table: IV-9 Estimate of Annual Revenue availability for the 162
vii
National Highway Development Project Fund (NHDPF)
Table: IV-10 Financial Arrangement for NHDP (Phase- I &II) for Cost at 167
1999 Prices
Table: IV-11 NHDP Outline for all Phases I To VII. 169
Table: IV-12 Progress of Golden Quadrilateral & NS-EW of NHDP 171
Phase-I & II
Table: IV-13 NHDP Financing Revised Assumptions 173
Table: IV-14 Financing Assumption of NHDP during Eleventh Plan 174
Period (2007-12)
Table: IV-15 Financing of NHAI 178
Table:IV-16 Achievements of National Highways after Independence 184
(mainly through Budgetary Allocations)
Table: IV-17 Achievement of whole NH Sector during Ninth Five Year 185
Plan (1997-2002) which is mainly through State PWD.
Table:IV-18 Financial Performance of NH other Than NHDP (i.e. 186
without NHAI) During Tenth Plan
Table:IV-19 Financial Performance of NH under NHDP during Tenth 187
plan (Year wise total amounts for external assistance
program, cess /investments& NHAI Phase III)
Table: IV-20 Constrained Funding of M&R for NH Sector 189
Table:IV-21 Modus Operandi for Cash Contracts 192
Table: IV- Public- Private Partnership in NH Development by 208
22:A MOSRT&H (BOT).
Table: IV-. Public- Private Partnership in NFIDP by NHAI 209
22 :B
Table: IV-23 Risk Allocation under Force Majeure 219
Table:IV-24 Driving Factors for investors in PPP for Highways. 231
Table:V-l Chalthan ROB on NH-8: Major Events 255
Table: V-2 Toll Rates Specified for Chalthan ROB 260
Table: V-3 Risk Allocation as per Concession Agreement for Chalthan 261
ROB
Table: V-4 Chalthan ROB Project Cost Estimated by Entrepreneur 264
Table:V-5:A Operational Performance of Chalthan ROB 265
Table: V-5:B Movements in the Long Term Sources of Finance of 266
Chalthan ROB
Table:V-6 Average Daily Traffic at Kadodara Junction Km 259/4-6 on 268
NH-8
Table:V-7 Delhi-NOIDA Toll Bridge Major Events 273
Commencing from 30 December 1998
Table:V-8 Base Toll Rates on DND Flyway 279
Table: V-9 History of Toll Rate Revisions on DND Flyway 281
Table:V-10 Risk Allocation as per NTBCL Concession Agreement 286
Table:V-ll Original Debt Structure (1997-98) Proposed for NTBCL 289
VIII
Table: V-12 Financial Plan of NTBCL 290
Table: V-l 3 Project Cost of Delhi-NOIDA Toll Bridge 291
Table:V-14 Shortfall in Traffic as Compared to Estimated on Delhi- 293
NOIDA Toll Bridge
Table:V-15 Actual Versus Projected Financial Performance of Delhi- 294
NOIDA Toll Bridge
Table:V-16:A Operational Performance of Delhi-NOIDA Toll Bridge 295
Table:V-16:B Movements in the Long Term Sources of Finance for Delhi- 296
NOIDA Toll Bridge
Table:V-17 DDBs Redemption Exercised by NTBCL 300
Table:V-18 Equity Infusion as a Restructuring process of NTBCL 302
Table:Y-19 Leverage Ratio for Delhi-NOIDA Toll Bridge 303
Table: V-20 Hikes in Toll Rate as compared to base rates (1996) on 307
DND Flyway
Table: V-21 Toll Collection.on Mahi River Bridge on NH-8 315
Table:V-22:A Cashflow Statement Projected by Halcrow up to 2021 318
Table: V-22:B Extension of Halcrow Calculation for Cash flow & NPV for 320
Full Term up to 2030
Table:V-22:C Extension of Projected Cashflow up to 2037 321
Table:V-23 Achievements in Daily Traffic during 2006-07 Compared to 322
as Envisaged by Halcrow
Table:V-24 Effect of Reducing Tolls on Estimated NPV for Sell Out 322
Table:V-25 Alternative Routes to Vadodara-Haloi- Shamlaji Road 325
Table: V-26 Cost Comparison for Three Options 326
Table:V-27 Civil Cost Related Features and Major Events of the Project 327
Table:V-28 Estimated Landed Project Cost 328
Table: V-29 Base Toil Rates for VHTRL 332
Table:V-30 Actual Toll Rates on Vadodara- Halol Toll Road 333
Table: V-31 Risk Allocation as per VHTRL Concession Agreement 336
Table: V-32 Original Debt Structure (Before Financial Close) Proposed 338
by VHTRL
Table:V-33 Actual Financial Plan (on Financial Close) for Estimated 339
Project Cost
Table:V-34:A Survey Results at Feasibility Stage in 1996 for Vadodara- 341
Halol Road
Table:V-34:B Short Fall in Traffic on Vadodara- Halol Road 342
Table:V-35 Loan Repayment Default of VHTRL 345
Table:V-36:A Operational Performance of VHTRL 345
Table: V-36:B Movements in the Long Term Sources of Finance for 346
VHTRL
Table:V-36:C Leverage Ratio for VHTRL 347
Table: V-37 Base Toll Rates for Project Road and NH Four lane 352
Table: V-38 Comparison of Vadodara — Halol Toll Rates with NE-1 353
IX
Table:V-39:A Estimation of Future Cashflow for VHTRL 359
Table: V-39:B Estimation of Future Cashflow for VHTRL 360
Table:¥-40 Per Day Average Traffic Flow near Narmada Bridge Site on 363
NHN0.-8
Table:V-41 Civil Cost Related Features and Major Events of the Project 364
Table: V-42 Toll Rates Applicable over the Time 371
Table: V-43 Risk Allocation as per NICE Concession Agreement 374
Table: V-44 Financial Plan of NICE as on March 2000 377
Table: V-45 Tollable Traffic Realization in Narmada Toll Bridge Project 379
Table: V-46:A Operational Performance of NICE 381
Table: V-46:B Movements in the Long Term Sources of Finance for NICE 381
Table: V-46:C Leverage Ratio for NICE 3 83
Table:V-47 Claim for Delay in Toll Rate Revision for NICE 385
Table: V-4S Increase of MAV in Total Truck Population for NICE 3 86
Table: V-49:A Compensation to NICE on Termination 391
Table: V-49:B Estimation of Future Cashflow for NICE 392
Table: V-49:C Estimation of Future Cashflow for NICE Case 393
Table:V-50 Effect of Reducing Tolls on Estimated NPV for Sell Out 393
Table: V-51 Comparative Illustration of Selected Four Case Studies 400
Table: VI-1:A Range of Taxes on Road Sector 425
Table: VI-1:B Total Taxes on Vehicle Type 426
Table:VI-2 Realization of per Vehicle Taxes on Road Sector 427
Table: VI-3 Total Revenues and Expenditure Mismatches (FY 2002) 428
Table: VI-4 Toll Rates on NH Sections on Four Lanning at Base Level 431
and Adjusted for Inflation for 2006-2007
Table:VI-5 Mean for Car users on Vadodara-Halol Toll Road 447
Table: VI-6 Response for per Km Saving and WTP for Trucks 452
Table: VI-7 Analysis for Highly Acceptable WTP (Yl) for Cars 459
Table: VI-8 Analysis for Acceptable WTP (Y2) for Cars 461
Table: VI-9 Analysis for OK WTP (Y3) for Cars 462
Table: VI-10 Regression Results of Intercept for WTP (Yl to Y3) for Cars 464
Table: VI-11 Vehicle Operating Cost for Car Users 466
Table: VI-12 Analysis for Mean WTP (Y) 469
x
List of Figures
Figure No. Details Page
No.
Figure: III -1 Spectrum of PSP 75
Figure: III-2 Traditional Delivery of Road Works 77
Figure: III-3 Changing Delivery of Road Works 81
Figure :III-4 Conceptual Structure of Concession for Roads 90
Figure: III-5 Portugal Case of Selection for Concessionaire 113
Figure: IV-1 NHAI Spending on NHDP 179
Figure:IV-2 Execution of NH Works by NHAI (non PPP) 198
Figure:lV-3 PPP Approval Process for NH 227
Figure-V-l Diagram showing the local alternative of ROB (CHALTHAN) on 267

N.H.No. 8
Figure: V-2. Conceptual Understanding of Chalthan ROB BOT Project 270
Figure-V-3 Operational Performance of Delhi NOIDA Toll Bridge 297
Figure-V-4 Movements in the Long Term Sources of Finance for Delhi- 297
NOIDA Toll Bridge
Figure: V-5 Project Structuring of NTBCL under Rate of Return Regulation 311
Figure:V-6 Cornerstones of NTBCL Concession Agreement 312
Figure: V-7 Project Span for Vadodara- Halol Toll Road 330
Figure: V-8 Traffic Shortfall on Vadodara- Halol Toll Road 342
Figure: V-9 Monthly Traffic Variation on Vadodara- Halol Toll Road 343
Figure: V-10 Operational Performance of VHTRL 346
Figure: V-l 1 Movements in the Long Term Sources of Finance forVHTRL 347.
Figure: V-12 Project Structuring of VHTRL under Rate of Return Regulation 357
Figure:V-13 Force Majeure Events & Compensation 375
Figure:V-I4 Monthwise Toll Collection for NICE 380
Figure:V-15 Operational Performance ofNICE 382
Figure:V-16 Movements in the Long Term Sources of Finance for NICE 382
Figure: V-17 Conceptual Understanding ofNICE BOT Project 388
Figure:VI-l Conceptual Relation of WTP with Viability of BOT Project 422
xi
ACRONYM
AASHTO American Association of State Highway and Transportation
Officials
AC Average Cost
ADB Asian Development Bank
AMPM Active Management Payment Mechanism
AMTRL Ahmedabad- Mehsana Toll road Company Ltd
ANOVA Analysis of Variance
BOT Build-Operate-Transfer
BOOT Build Operate Own Transfer
BRO Border Roads Organization
BTO Build Transfer Operate
CA Concession Agreement
CAG Comptroller and Auditor General of India
CCEA Cabinet Committee on Economic Affairs
COI Committee on Infrastructure
CPI Consumer Price Index
CRF Central Road Fund
CSC Construction Supervision Consultant
DBFO Design Build Finance Operate
DCF Discounted Cash Flow
DDB Deep Discount Bond
D/E Ratio Debt Equity Ratio
DND Flyway Delhi-NOIDA Direct Flyway
DPR Detailed Project Report
DRB Dispute Resolution Board
EAP External Assistance Programme
EIRR Economic Internal Rate of Return
EOT Extension of Time
EPC Engineering Procurement Construction
EU European Union
FHWA (FHA) Federal Highway Administration
FEDIC Federation Internationale des Ingenieurs Counseils i.e. The
International Federation of Consulting Engineers
FIRR Financial Internal Rate of Return
FY Financial Year
GDP Gross Domestic Product
GOG Government of Gujarat
GOI Government of India
GQ Golden Quadrilateral
GSHP Gujarat State Highways Project
xii
GTRIL Gujarat Toll Road Investment Company Ltd
CTRL Gujarat Toll Road Company Ltd
GT Road Grand Trunk Road
HMV Heavy Motor Vehicles
IA Independent Accountant
IDBI Industrial Development Bank of India
IDC Interest During Construction
IDFC Infrastructure Development Finance Corporation
IE Independent Engineer
IL&FS Infrastructure Leasing & Financial Services
IPC Interim Payment Certificate
IRC Indian Roads Congress
IRR Internal Rate of Return
LCV Light Commercial Vehicles
LD Liquidated Damages
LPVR Least Present Value of Revenue
L&T Larsen and Toubro
MAT Minimum Alternate Tax
MAV Multi Axle Vehicles
MCA Model Concession Agreement
MOSRT&H Ministry of Shipping Road Transport And Highways
M&R Maintenance and Repairs
NCF Net Cash Flow
NH National Highway
NHAI National Highway Authority of India
NHDP National Highway Development Project
NICE Narmada Infrastructure Construction Enterprise Limited
NOIDA New Okhla Industrial Development Authority
NPV Net Present Value
NS-EW North South -East West
NSS National Savings Scheme
NTBCL NOIDA Toll Bridge Corporation Ltd
NTHS National Trunk Highway System
O&M Operation and Maintenance
PBP Pay Back Period
PCD Provincial Communications Department
PCU Passenger Car Unit
PFI Private Finance Initiative
PIU Project Implementation Unit
P/LA/C Profit and Loss Account
PLR Prime Lending Rate
PPC Public Private Comparator
ppp Public-Private Partnership
PPPAC Public Private Partnership Appraisal Committee
PSC Public Sector Comparator
PSC Project Supervision Consultant (only used by CAG reports)
PSP Private Sector Participation
PWD Public Works Department
PWF Public Works Financing
QA Quality Assurance
QC Quality Control
RTO Road Transport Office
SBI State Bank of India
SFC Standing Finance Committee
SH State Highway
SLM Straight Line Method
SOE State Owned Enterprise
SOR Schedule of Rates
SP Special Publication
SPV Special Purpose Vehicle
SRMC Short Run Marginal Cost
STG Steering Group
RFP Request For Proposal
RFQ Request For Qualification
ROB Road Over Bridge
UK United kingdom
UP State Uttar Pradesh State
US United States
USDOT United States Department Of Transportation
VHTRL Vadodara- Halol Toll Road Company Ltd
VOC Vehicle Operating Cost
WB World Bank
W.E.F. With Effect From
WPI Whole Sale Price Index
WTP Willingness To Pay
xiv
CHAPTER!
INTRODUCTION
1.1 BACK GROUND OF STUDY
1.1.1 Road network in India
1.1.2 Planning Of National Highway Development Project And Its

Implementation
1.2 RATIONALE OF STUDY
1.3 OBJECTIVES OF STUDY
1.4 SCOPE OF STUDY, RESEARCH DESIGN AND SOURCES OF DATA
1.4.1 Selection of Case Studies
1.4.2 Preliminary Survey for Willingness to Pay
1.5 SCHEME OF CHAPTERS

CHAPTER-I
INTRODUCTION
1.1 BACK GROUND OF STUDY:
Of late, Indian road sector has seen overt divergence from its traditional public sector
produced delivery system. The National Highways being. commercially most
important roads, Government recognizes that development of this segment of road can
not wait for adequacy of budgetary allocations. The Government has set up dedicated
autonomous implementing agency with dedicated source of funds to carry out
historical scale of development of National Highways in India. To carry out the
mammoth scale of development of National Highways, Government has resorted to
outsourcing of designing, supervising and quality related activities for speedy
execution of projects with international standards. The most significant aspect is it has
handed over many stretches of National Highways to private sector to build and then
operate for decided period where private investors are allowed to recover investments
through directly tolling the road users. The modality of private sector participation to
this extent is termed as Public Private Partnership (PPP) and it has become major
currency for Indian policy makers like worldwide counterparts. Knowing the paucity
of public funds, it is inevitably envisaged by Indian Government to attempt the route
of PPP for development of National Highways on very large scale in the Eleventh
Five Year Plan Period (2007-2012). The PPP route is also going to be major way of
developing important State Highways. But roads being perceived as public goods,
development and operations of road facility using private investments ripple many
issues at planning (at project formulation level) and management (at project operation
level) stages. These are issues mainly related to commercial viability of investment
and public acceptance of such projects.
1.1.1 Road network in India:
The road sector in India consist of hierarchy starting from rural connectivity roads
with narrow single lane (3 meter to 3.75 meter width) and degrading riding quality to
superior high speed access controlled six to eight lane Expressways. These roads are
traditionally developed and maintained by respective State Governments (for State
2
Highways, District roads and rural roads) and by Central Government (for National
Highways and Expressways) by means of budgetary allocations. As shown in Table:
1-1, the total road network in India stands at 33,00,000 km with road density more
than 100 km per 100 square km geographic area. Ironically, India stands at second
position in terms of length of road net work and for road density. But in terms of
superior length statistics, it is not figured in comparison with many leading nations
(Zhang 2005).
Table:I-l
Present Road network In India
Indian Road Network As On June 2007
Expressways 200km (0.006%)
National Highways (NH) 66590km (2.00%)
State Highways (SH) 131899km (4.00%)
Major and other District Roads 467763km (14.00%)
Rural Roads 2650000km (80.00%)
Total of Indian road network 33 Lakhs Kms(Approx)

(100%)
(Source: National Highway Authority ofIndia (NHAI) home site: www.nhai.org)
Among whole network, NH carries prime importance for facilitating interstate

commerce and hence they are arteries of national economy. Even though National
Highways (NH) constitutes only about 2% of this road network, they carry about 40%
of the total road traffic. But NH in India need not mean a full fledged road section
even at present. The Ministry of Shipping Road Transport and Highways
(MOSRT&H) is the ultimate governing ministry for National Highways and ministry
reports that almost one third of NH in India is yet single lane road that is like rural
road.
3
1.1.2 Planning Of National Highway Development Project And Its
Implementation:
The deficiency in roads sector in general and NH in particular was in view since early
1990s and there was concurrent thrust for development of infrastructure including
roads in India. There were various need assessments for requirements of investments
in roads. All of them basically meant huge unprecedented fending requirement for
improvement of roads including NH and hence beyond the budgetary capacity of
governments. In October 1994, the Department of Economic Affairs and Ministry of
Finance, GOI established an Expert Group on Commercialization of infrastructure
projects under the chairmanship of Dr. Rakesh Mohan. The “India Infrastructure
Report” of Dr. Rakesh Mohan (1996) expressed that in India so far connectivity was
emphasized and thus rural roads have increased. But now National Highways and
State Highways shall expand in matching manner considering pace of traffic growth.
The report identified deficiency of the road sector and it was estimated to provide Rs.
32,000 crore in 1996-2001 and Rs.63,000 crore during 2001-2006 for construction of
NH, SH and Expressways. For these two periods, provision for maintenance required
was estimated Rs. 9000 crores and Rs. 11,500 crores respectively. This was unusual
requirement because total expenditure (Centre and States) in the Eighth Plan period
(1992-97) was just around Rs. 13,000 crores. This report also stated that the
administrative delays and problems in case of NH shall be undone by entrusting sole
responsibility of planning, developing and maintaining NH and Expressways in India
to the specialist agency, National Highway Authority of India1 (NHAI) only. Thus,
State authority (i.e. respective State PWD which has been engaged in NH works as an
agency for Central Government) shall be separated out of NH activities. For fending
of NH development, it was proposed that a Highway Development Fund be created in
India by levy of a feel cess of Rs. 0.50 per liter of diesel and Rs.1.0 per liter of petrol.
Under these circumstances, a National Highway Development Project (NHDP) was

launched by then Honourable Prime Minister Mr. Atal Bihari Vajpayee on
January 2, 1999 supported by dedicated revenue based on cess on feels. The NHDP
was initially comprised of Golden Quadrilateral (GQ) work (Phase-I) and now the
scope is extended up to Phase-VII. NHDP Phase I was approved by Cabinet
Committee on Economic Affairs (CCEA) in December 2000 at an estimated cost of
Rs. 30,300 crore (1999 prices) comprising 5,846 km of Golden Quadrilateral
4
connecting four metropolitan cities of Delhi, Mumbai, Chennai and Calcutta; 981 km
of North-South and East-West corridors; 356 km of Port Connectivity and 315 km of
other National Highways, a total of 7,498 km. This was expanded by adding North-
South and East-West corridors (total 7,300 km), connecting Srinagar to Kanyakumari
and Silchar to Saurashtra respectively and Salem to Cochin under Phase II. Now
collectively NHDP was estimated to cost Rs 54,000 crore (1999 prices). Later, NHAI
was also asked to four lane port connectivity of400 km and other projects of 600 km
at a cost of about Rs. 4,000 and thus revising cost to Rs. 58,000 crores. The idea is to
ensure nationwide road connectivity of superior standards. These are the only Phases
actually under implementation stage whereas remaining Phases are mostly at planning
stage. The implementation of these two Phases however has seen many problems.
The implementing agency (NHAI) was asked to complete Golden Quadrilateral by

December 2003 which was completed about 90% by Dec 2005 and yet to see 100%
completion. The problems narrated by NHAI for delays are -utility shifting,
termination of some contracts in GQ, land acquisition, contractors’ sluggish progress
etc. The NHAI has adopted private sector participation for design, supervision and
quality assurance and some BOT projects are taken up inviting private funds. Though
NHAI is implementing NHDP making a clear break from the State PWDs and has
established a new paradigm for the delivery of road projects, generic problems are
found same as State PWDs during execution. The East-West Corridor (Phase- II) is
also substantially delayed beyond scheduled completion by December 2007. Most
importantly, the implementation of NHDP is carried out so far utilizing cess funds
(through EPC contracts) and merely around 10% of investment has come from private
sector despite NHAI was mandated to act on business principles. If NHDP was to be
implemented through cess funds, it is like budgetary allocations then State PWD
already existed to do the job. Hence, the changed delivery system of NH has not
really delivered the expected goods so far.
Knowing the problems with EPC type of contracts awarded by NHAI, Committee on
Infrastructure (COI) was set up by Government of India on August 31, 2004, chaired
by the Prime Minister of India. The COI is expected to see rise in private sector
participation in highways. Under Chairmanship of Prime Minister, COI has
concluded that for higher quality of construction and maintenance of roads and
S
completion of projects without cost and time overrun, contracts based on Build-
Operate-Transfer (BOT) model are inherently superior to the traditional EPC
contracts. Consequently, the Working Group for Eleventh Plan (2007-2012) has
envisaged 50% of the requirement of funds during the 11th Plan (2007-2012) for
implementation of NHDP (total estimated requirement is Rs. 1,73,501 crores) to be
received from private sector participation. Thus the thrust of highway development
has been concentrated on BOT type of private sector participation formats wherein,
private investors make upfront investments and recover costs with some returns
mainly through tolls from users. The Public-Private Partnership (PPP) is the term
often coined for such private sector participation which is more synonymous with
highway projects undertaken on BOT format. Since PPP projects typically involve
transfer of public assets, delegation of Governmental authority for recovery of user
charges, private control of monopolistic services and sharing of risks and contingent
liabilities by the Government; the need to secure value for public money and
protection of user interests are to be ascertained through some mechanism. In practice,
the Concession Agreements are found all that defining and regulating PPP. The
concession agreements are the Government award for allowing private concessionaire
to exploit natural monopolistic conditions created by virtue of these agreements for
substantially long period.
Under this background, cases of BOT projects are studied for their relevant issues
emerging at planning and management stages. The very important dimension of PPP
project i.e. Public (users) it self is interacted for its issues on acceptance/non
acceptance of such projects.
1.2 RATIONALE OF STUDY:
As depicted above, huge unprecedented private investment is expected to be attracted

mainly for National Highways and some important State Highways in coming years.
The private investment will be on PPP route and hence will be associated with
handing over of public assets of highway for considerable tenure and users will be
exposed to this new owner of assets on use point. The transfer of monopolistic
operation of assets will be regulated by concession agreements signed by the
Government with the private concessionaire. It is quite interesting to view this process
of awarding monopoly to operate a public utility in economic perspective.
6
The roads are perceived as public goods by users owing to its free provision by State
but it takes various forms under different regulations as given in Table:I-2. As
illustrated in this table, the road transforms from public goods or common resources
in to natural monopoly when it is put to tolling after developing for present and future
needs. Usually economists explain natural monopoly as a position when due to
economy of scale, a single firm can supply a good or service to the entire market at a
lower cost than two or more firms (Mankiw 2004). More over, natural monopoly
goods are produced at very high fixed cost required at inception as compared to
subsequent low variable costs. Hence planners consider that it is wasteful to have
multiple providers of such goods/services e.g. it will be meaningless to erect two
bridges in competition over a river in rivalry when capacity of one bridge is in need.
Table: 1-2
Status of Roads under Varying Economic Conditions
Private Goods Public Goods
Excludable and Rival e.g. congested toll Neither Excludable nor Rival e.g.
roads uncongested nontoll roads
Common Resources Natural Monopolies
Are Rival but not excludable e.g. Are Excludable but not Rival e.g.
congested nontoll roads uncongested toll roads
(Source: Mankiw 2004)
So it is worldwide practice to allow by regulation, monopolistic conditions to the

utility provider so that he can be insulated from ruinous competition and durability of
his original investment is secured. The Indian experience of regulating public utilities
(including roads) is at nascent stage as it begun from late 1990s. But it was widely
believed by the policy makers (especially from European nations who were pioneers
in granting concessions for public utilities) that the public interest would be best
promoted by grants of special privilege to private persons in such industries. These
included patents, subsidies, tariffs, land grants to the railroads, and monopoly
franchises for public utilities. However, the final result was monopoly, exploitation,
and political corruption (Gray 1940). A group of economists labeled them "the sinister
7
forces of private privilege and monopoly," that prevailed in early decades of 1900s
using the theory of natural monopoly wherein protection of consumers faded into the
background (DiLorenzo 1996). In 1968, Harold Demsetz observed that under the
argument of -ruinous competition, excessive duplication and durability of original
investment many public utility fields (including roads) were wrongly insulated from
competitive forces and he proposed that though competition within a natural
monopoly market is costly, it is possible to set up competition for the market
(Demsetz 1968) to avoid problems with monopolistic pricing and under-production.
In the words of Edwin Chadwick, who proposed a precursor to Demsetz’s idea in
1859, competition for the field substitutes for competition in the field (Engel et al.
2002). So, unlike other consumption goods, Demsetz believed that a user need not be
offered two bridges standing near by over a river and competing on rivalry but the
pricing of single utility asset under monopoly can be influenced by inviting
competition for getting such concessions that will resemble with market price under
competition. The public utility auctions based on Demsetz’s idea are known as
“Demsetz Auction” and it is world over in practice with little variations. In practice,
the natural monopoly is awarded to the private firm in terms of concession agreement
(under mutual agreement or adopting “Demsetz Auction”) and regulators dictate the
private provider of services to charge the users either based on rate of return
regulation or price cap regulation. The concept is simple; it allows the private concern
to recover investment on agreed rate of return by allowing pricing to earn that return
under rate of return regulation. In case of price capping, the agreement is based on
implicit rate of return to be earned by the private investor but the prices are capped
based on initial calculations for that level of return and irrespective of actual rate of
return occurring to the investor, prices are not adjusted. This regulation can result in
to winner’s curse if the cost overruns and/or estimated revenues are not generated
from pricing. Similarly it can result in to windfall if the concessionaire manages
saving in cost and/or attracts more than estimated revenues from pricing. Hence in
case of occurrence of estimated conditions, both the regulations perform at par for the
users as well for the investors. But any variation could make big impact on the stake
holders of the assets.
In India, Government is following price capping regulations for development of

highways except few pioneering cases of rate of return regulations. The Demsetz
8
auctioning is widely followed by State and Central Government at initial stage for
awarding of concession for highways that is widely known as BOT agreements. In
principle, the present Indian practice of awarding concession for highways is partial
application of Demsetz auctioning as next round of competition for field for adjusting
the prices to the market conditions is not made during long tenure of concession. The
Indian experience of such agreements is very brief as it has entered highway sector
very late in 1990s and such projects are constructed and put to operation mostly from
year 2000-2001 onwards. Thus actual implementation of such auctions after the award
is made for natural monopoly is very new area of study and yet academically
unexplored by the researchers. Hence in this study, cases of both the price regulations
are selected to study the effect of price regulation on the viability of projects which is
in turn helpful in understanding issues related to sustainability of the selected route of
PPP, giving due consideration to users’ preferences. The scope of study is also
covering aspects related to award of natural monopoly to private sector in terms of
provisions of concession agreement and its actual implementation.
If the scarcity of funds is compelling to Sovereign to hand over fields of public

utilities, Kerf et al. (1998) quotes the famous nineteenth century economist Alfred
Marshall for this decision. The prescription is, not to follow usual practice of least
cost to Government but the focus shall be on pricing and service standards. The
Indian practices need evaluation for this aspect.
1.3 OBJECTIVES OF STUDY:
The overall objective of this study is to bring out planning and management issues to
promote sustainable Private Sector Participation (PSP) in roads development and
understand factors affecting willingness to pay (or not to pay) for using the roads.
Precisely the objectives are:
i) To inquire into the status of prevalent practices with reference to road facility
creation and financing of the same through international experience.
ii) To inquire into the prevalent views with reference to control of road facility as
a public good and methods of ownership, transfer of ownership, viability of
projects with the help of literature review.
9
iii) To understand the status of road development in India , the urgent need for
road development, the causes for private sector participation and regulatory
development for the same.
iv) To identify present level of PSP (Private sector participation) and scope for the
same in roads development.
v) To identify issues related to PSP at project formulation level and management

level based upon case studies.
vi) To inquire into ‘Willingness To Pay’ for use of road facility.
vii) To find out measures to promote sustainable PSP in roads development and to
understand factors affecting willingness to pay for using the roads.
1.4 SCOPE OF STUDY, RESEARCH DESIGN AND SOURCES OF DATA:
Since a national level highway programme (NHDP) is already underway in India, the
implementation of this programme, policy reforms and various agreements in vogue
for PPP route of private sector participation are providing opportunity to study the
PSP related issues for the road sector. The NH being commercially important for
nation and being trend setter for development of road sector, study of this segment has
been emphasized as compared to remaining categories. The research work is designed
to cover the planning and implementation of NHDP at programme level keeping in
view international experience in taking up such programmes. The library work and
internet searches helped in gathering relevant information on this subject matter.
However, no text books on comprehensive studies of Private Sector Participation in
Roads are available for ready reference. The research work also encompasses project
level study of selected case studies under PPP route in India. The user’s preferences in
terms of willingness to pay are inquired conducting preliminary surveys for
Willingness To Pay.
1.4.1 Selection of Case Studies:
The selection of case studies from projects implemented in India on PPP route is
based on two basic criterion .As discussed in subsection 1.2, the monopolistic
conditions of PPP projects are regulated either by rate of return based or price capped
based regulation. Hence, cases from both of these categories are selected from
10
growing population of PPP projects. As a population, 25 BOT projects by
MOSRT&H and 55 BOT projects by NHAI thus 70 projects are so far awarded in
NH segment during last decade but more than half of them are yet to get in to
operation stage or has just begun to collect tolls (Paragraph 4.8.5 Chapter-IV). Hence,
effective population is around 35 projects for NH segment. Knowing the fact that
these projects have come into operations from around year 1999-2000, the tenure of
toll operations have been seven to eight years only. More over, first batch of BOT
projects on NH had small concession period and are already transferred back to
Government whereas recent projects are yet at nascent stage. The BOT statistics at
State level is yet not officially available but can not be more than twenty as found
from discussion with officials in this field. Gujarat State has completed five projects
on BOT basis on State Highways out of which four are under tolling and one has
completed the tolling stage. Except few projects (mainly by IL&FS), almost all
projects on NH and State Highways are based on Price Cap regulation.
Under this background, two projects on State Highways and two projects on NH are
selected which also represented Price Cap regulation (for State High cases) and Rate
of Return regulation (for NH cases).Among these four cases, three representative
projects have been selected with substantial ongoing tenure of operations whereas one
completed project of Chalthan Road Overbridge is selected for illustrating historical
litigation for local traffic problem. The selected NH cases are part of NHDP. A
limiting fact is some element of commercial confidentiality plays a restrictive role in
selecting case studies. The selected case studies are:
1. Construction Of Four Lane Road Over Bridge In Lieu Of Level Crossing Near
Village Chalthan On NH No.-8 in Gujarat State (Chalthan project)
2. Construction of Delhi -NOIDA Toll Bridge in NOIDA (UP State)- IL&FS

project (NOIDA Project)
3. Construction Of Four Lane Vadodara - Halol Road SH No.-87 with access

control divided carriage and Service roads km 8/300 to 40/00 in Gujarat State-
IL&FS project (Vadodara- Halol project)
4. Construction Of Additional Two Lane Bridge Across River Narmada With

Approaches on NH No.-8 km 192/0 to 198/0 in Gujarat State (NICE project)
11
Keeping the objectives of study in view, the scope of case studies include aspects of
project formulation that encompasses - basis of project selection, actual site
conditions, decision for fixing toll rates, derivation of toll period, types of concession
regulation adopted in framing agreement, traffic characteristics for planning level
issues. The study of actual operational part of concession agreement is relevant for
understanding of management issues. The operational part is most important to know
about the robustness of concession agreement in inviting and protecting private and
public interests. The audited financial results of companies are found useful to
describe commercial viability of project. The project details, concession agreements
and operational details like toil revenues and expenses were gathered from offices of
concessionaires and some details are availed from internet. Also, relevant details are
traced from Government offices.
1.4.2 Preliminary Survey For Willingness To Pay:
Regarding primary data, Willingness To Pay (WTP) surveys are conducted on users
of one of the case studies. The field surveys on NH could have been difficult to
conduct looking to the exorbitant volume of traffic beyond 60,000 PCU per day. This
limitation guided to select Vadodara- Halol toll road for WTP surveys. The users
consist of two wheelers, three wheelers, cars/jeep and commercial vehicles like
Trucks and buses. The samples are collected from population of Cars and Trucks only
to represent passenger movement and goods movement respectively. Practically the
surveys for cars are done on toll road itself. For trucks, looking to the limited decision
making capacity of truck drivers in choosing toll roads versus free roads and
communication problems with truck drivers, it was preferred to make personal
dialogue in the offices of truck owners/operators (which are located near Golden
Chokdi near entrance point of Vadodara- Halol Toll Road) in presence of truck
drivers. Looking to the sensitivity of issue, mailing or telephonic interviews were
avoided for gathering primary data collection.
The primary data collected from field survey for Willingness To Pay is statistically
analyzed using multiple variable linear regression model. The results are tested for
goodness of fit (coefficient of determination adjusted R2) and significance of
individual coefficients of regression. An analysis of variance (ANOVA) technique
provides F-test which is used herewith to verify overall significance of the model. For
12
data analysis of survey results, Microsoft Office- Excel Worksheets are found useful
tool.
1.5 SCHEME OF CHAPTERS:
The course of intended work basically maneuvers around programme level private
sector participation for NHDP and some PPP project specific details leading to answer
important questions like - what is really changed delivery system for highways and
how effective it is in enhancing private sector participation in development of roads,
what are the basic issues of private interest and public interest to be equated in
designing a monopolistic concession etc. The actual stream of chapters is arranged as
below.
Chapter-I is encircling study back ground justifying rationale for taking up this
study. The study framework is derived and objectives of study are narrated with
methodology.
Chapter-H is encompassing relevant literature review for harnessing the objectives

of study. The study postulates Private Sector Participation to the extent of Public
Private Partnership (PPP) as inevitable conceding world over argument for
diminishing financial capacity of states to directly finance road projects as compared
to growing demand. This is investigated by study of literature.
Chapter-HI is basically related to study of spectrum of Private Sector Participation

and understanding of conceptual structure of concession for roads that holds the key
to design highway projects on Public Private Partnership. The international
experience for contracting out highway works on non PPP basis and on PPP basis are
studied in this chapter that is helpful in design of concession for PPP projects. The
structure of PPP is studied in terms of delivery process and various possible forms of
PPP are also studied depicting various levels of private sector participation allowed by
different countries. How other countries including the pioneer European countries
have waded through such movement is studied and evaluated for their road
development programmes. The Latin American experience of canceled and
renegotiated enormous PPP contracts and in particular Mexican Toll Road
Programme being similar to Indian NHDP are important aspects of international
13
experiences in PPP. This chapter establishes base for evaluation of PPP in developing
Indian highways in subsequent chapters.
Chapter-IV presents the development of National Highways in India through

various agencies and the issues related to planning and management of National
Highways Development project (NHDP).This chapter is encompassing various policy
shifts in developing National Highways in India and emergence of project formulation
under PPP contracts. The projects on national highways have been traditionally
implemented by State PWD under auspices of MOSRT&H, Government of India.
The changing role of executing agencies and emergence of central autonomous nodal
executing agency i.e. NHAI is explored in view of massive investments envisaged
under much proclaimed ambitious NHDP. The financing structure of NHDP is
evaluated at programme level and contracting documents are assessed in terms of
what kind of partnership is embedded in such contracts. As and where required, cross
references are made to similar massive programmes undertaken by US (Interstate
Highways Project) and China (National Trunk Highways System).
Chapter-V discusses PPP case studies of highway projects executed under private
sector participation in India. The highway projects under private sector participation
are essentially formulated as toll projects on BOT basis and the entrepreneur invests
upfront signing a concession agreement between himself and Sovereign. The risk-
reward characteristics of such investments are experienced during construction stage
and toll operation stages. There are host of risks attached to project formulation and
implementation of such projects. The selected case studies evaluate robustness of such
agreements for various ground realities or risks perceived /encountered. The
contracting document i.e. concession agreements are perused for evaluating security
of private interests after welcoming private sector participation but keeping public
interest at the top. As discussed earlier, these project specific studies are selected for
both type of pricing regulation. The outcome of monopoly awarded through
concession on commercial viability of such projects and on the sector itself is
explored keeping users’ interest in view. The bankability of concession agreement,
lenders’ recourse, users’ recourse etc. issues are explored using details of case studies
for sustainability aspect of PPP.
14
Chapter-VI discusses user’s preference in tolling a highway after developing it for
present and future needs. A field survey for cars and trucks is conducted to understand
the issues related to willingness to pay (WTP) for passenger traffic and commercial
goods traffic respectively. The survey results are useful in identifying, various
attributes of WTP based on primary data collection. The statistical analysis is carried
out using standard statistical tools and statistically significant variables able to explain
WTP are derived for construction of a linear multiple regression model. The results of
this survey are useful in explaining users’ response to PPP policies undertaken by
Governments in India.
Chapter-VII presents the conclusions derived based on the detailed study. The
issues emerging out at planning and management stage are studied and listed for
policy implications.
The study is thus made and presented in seven chapters with list of references (and
end notes as applicable) kept at end of each chapter. At the end of seven chapters,
Bibliography is put up. This is followed by Appendix - 1 and 2 of questionnaires
used for primary data collection. The Appendix - 3 and 4 are related to application of
coefficient of correlation for both the survey results. After this introductory
background and defined objectives, relevant literature review is conducted in next
chapter before getting into the policy, programme, agencies and case studies related to
private sector participation.
‘ End Notes:
1. The National Highway Authority of India (NHAI) came into existence with
effect from June 15, 1989 but it was operationalised only in February 1995 Le.
in the Ninth Plan. These initial operations were not part of NHDP and till
almost year 2000-2001, respective State PWDs were the agencies
implementing NHDP. Even to day, many NH stretches related to NHDP are
managed by State PWDs and not yet taken over by NHAI in want of adequate
administrative and financial capacity.
15
REFERENCES
Benson and Moore (2002): Are Roads Public Goods, Club Goods, Private Goods
or Common Pools?- a manuscript from Florida State University
(gamet.acns.fsu.edu/~bbenson/hywys.docaccesseddated 16-3-07)
Benson, Bruce L. and Moore, DeVoe (2002): The Rise and Fall of Non-
Government Roads in the United Kingdom Florida State University A Draft Paper
(garnet.acns.feu.edu/~bbenson/bbh3.doc accessed on net dated 16-4-06)
Demsetz, Harold (1968): Why Regulate Utilities? Journal of Law and Economics
(April):55-65 (http://www.jstor.org/stable/724970 last accessed on 5-5-08)
DiLorenzo, Thomas J. (1996) :The Myth of Natural Monopoly Published in The

Review of Austrian Economics Vol. 9,No. 2: pp-43-58
(www.mises.org/journals/rae/pdftRAE9_2_3.pdf last accessed on date 12-6-08)
Engel, Eduardo; Fischer, Ronald, and Galetovic, Alexander (2002): A New

Approach To Private Roads Transportation Chapter: Regulation Fall (2002)pp-l8-
22 (last accessed on date 25-4-06 through Google.com)
Esther, Malini (1997): Evaluation Of Financial Viability Of BOT Transport

Infrastructure Projects Paper No.444, Journal of Indian Roads Congress Volume
58-1 (June).
Government of India (2007):Report Of The Working Group On Roads (2007-

2012) For 11th Five Year Plan -Ministry Of Shipping, Road Transport And
Highways Department Of Road Transport And Highways, (April) Government Of
India Document
Gray, Horace M.(1940): The Passing of the Public Utility Concept Journal of Land
and Public Utility Economics (Feb) quoted by DiLorenzo, Thomas J. (1996) in “The
Myth of Natural Monopoly” Published in The Review of Austrian Economics Vol.
9,No. 2: pp-43-58 (www.mises.org/journals/rae/pdf/RAE9_2_3.pdf last accessed on date
12-6-08)
Kerf, Michel with Gray, R. David; Irwin, Timothy; Levesque, Celine and Taylor,
Robert R. (1998): Concessions For Infrastructure: A Guide To Their Design And
Award: World Bank Technical Paper No. 399 Finance, Private Sector, and
Infrastructure Network (http://www.worldbank.org accessed on net dated 25-4-07)
Klein, Daniel B. and Majewski, John (2003).: America's Toll Roads Heritage: The
Achievements of Private Initiative in the 19th Century (December) Scandinavian
16
Economics Working Paper No. 30. (Available at SSRN:
http://ssm.com/abstract=487676)
Mankiw, N. Gregory (2004): Principles of Economics Thomson South-Western

Publications, Second Edition (2004)
Mohan (1996):“Rakesh Mohan Committee Report On Roadways” compiled and

published in Express Investment Week Weekly: Vol.7, issue No.6, Feb 3-9 1997
Standard and Poor’s (2002): Traffic Risk in Start - Up Toil Facilities: Standard and
Poor’s Infrastructure Finance (September) (www.standardandpoors.com accessed on
date 15-5-05)
Standard and Poor’s (2003): Traffic Forecasting Risk: Study Update 2003 Standard
and Poor’s Infrastructure Finance (November) (www.standardandpoors.com accessed on
date 15-5-05)
Zhang, Wei-Bin (2005): Report on 2005, FHWA and AASHTO Visit to China
Prepared for Federal Highway Administration (FHA) American Association of State
Highway and Transportation Officials (AASHTO)
(Available on www.pavementpreservation.org/publications/getfile.php?journal_id=841 last

accessed on 21-7-07)
17
CHAPTER-II
REVIEW OF LITERATURE
2.1 INTRODUCTION
2.2 HISTORY OF ROAD DEVELOPMENT AND TOLLS
2.2.1 Indian Perspective
2.2.2 International Perspective
2.3 EVOLUTION OF ROAD PRICING THEORIES
2.3.1 Diverse Views on Approach to Road Pricing
2.3.2 Public Goods and Externalities: The Case of Roads
2.3.3 Regulating Public Utilities: Demsetz Auctioning
2.4 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES IN

ROAD SECTOR
2.4.1 China
2.4.2 Mexico
2.4.3 Spain
2.4.4 US way of long term private sector participation- Most recent

Development
2.5 NATIONAL HIGHWAY DEVELOPMENT PROJECT (NHDP) AND

FINANCING OF INDIAN HIGHWAYS
2.5.1 Major Recommendation in Dr. Rakesh Mohan Committee Report

(1996) on Roadways
18
2.5.2 Financing of Indian Highways So Far and NHDP
2.5.3 Indian Issues in Infrastructural Investment: National Highway

Development Programme
2.5.4 Potential for Refinancing of NHDP Private Investment Projects—

A Credit Perspective
2.6 PLANNING AND MANAGEMENT OF TOLL ROADS
2.6.1 Evaluation of Financial Viability of BOT Transport Infrastructure

Projects
2.6.2 Traffic Risk in Start - Up Toll Facilities
2.6.3 Renegotiation of Infrastructure Private Projects - Key Aspects
2.6.4 Operation of Toll Roads, Bridges And Tunnels In Selected Places
2.7 WILLINGNESS TO PAY FOR TOLL ROADS
2.7.1 Willingness to Pay For Access Control Expressways
2.7.2 Estimating Willingness to Pay With Random Valuation Models -

An Application to Lake Sevan, Armenia
2.8 CONCLUSIONS
19
rTIAPTl?D
tMr TT
X JHiXv"XX
REVIEW OF LITERATURE
2.1 INTRODUCTION:
For years in India and in most of the countries in the world, the actual civil work is
executed by the private contractor only under State supervision and management. The
mobilization of skilled/unskilled labour and machineries is usually done by a private
entrepreneur to cater to needs of various departments of Government in the process of
supply of public goods like highways. Frankly, the State of the art has not seen much
upheaval for road or bridge building for atleast a decade which can not be managed
by Government Engineers. But the present euphoria for Private Sector Participation
(PSP) or limitedly known as PPP (Public-Private Partnership) is more in terms of
financial dependence on the private sector and thus palliating burden on state
exchequers. Basically, Government works by setting up various wings (design unit,
supervision unit, testing and auditing unit etc.) to produce the services of this sector
for people. Now, under PSP, one by one wing is partly or fully divested of their
assigned obligations and supplies of such services are procured from private sector
(outsourcing). The Private Sector is now penetrating to varying extent into the arena
of public body (e.g. State Public Works Department, PWD) and occupy one or all of
aspects of a road project like- planning, designing, financing, execution, supervision,
quality assurance, maintenance and operations of services including collection of toil
(if it is tolled facility) for decided years. The pinnacle of PSP is there when the pubic
road is developed using private funds and the road is handed over to the private party
to recover the investments under natural monopoly conditions. This modality of PSP
is better known as Public Private Partnership (PPP) because the private sector is
invited to share the investments and returns on public roads. The pricing of roads
raises issue of Willingness To Pay from road user side and commercial viability of
PPP projects. In the literature, this category of PSP or PPP for roads is presently more
synonymous with privately financed toll roads on Build-Operate-Transfer (BOT1)
basis. The BOT projects are very new to Indian road sector and have been only a
decade old.
20
This study postulates private sector participation in financing of road projects as
inevitable conceding world over argument for diminishing financial capacity of States
to directly finance road projects as compared to growing demand. Since the financing
of roads is generally linked to grant of concession rights to collect the tolls (and hence
access control on public road) planners are exposed to a gamut of issues which are
forming synthesis of this study. The regulating of public utilities (i.e. roads in this
case) for viability and public acceptance is presently done through signing concession
agreement which itself is a good area of research. The subject matter of this study is
multi-disciplinary, involving mainly Transport Economics, Commerce, Management
and Transportation Engineering. The literature for study is mostly gathered from
various libraries, offices of Corporate entities in toll roads, Government bodies etc
and from internet searches. The literature review and hectic discussions with major
players (Government officials, International consultants presently working for PSP
projects in India, Concessionaires and potential clients for Concessions who are
mainly contractors involved in cash contracts etc.) in the field revealed that no text
books as such are yet established (nil for Indian context) to cover all aspects under a
single shell to guide the investors and policy makers for making a successful PSP toll
project. The investors are warmly invited on commercial format for toll projects in
India. But project document either from State or Union government in India still shy
away to firmly admit roads as a commercial good meant for making profits. The
available literature encompasses virtually rhetoric on economics of road pricing and
related issues. Again, literature on road pricing is mostly clung to congestion on urban
or intercity roads leaving issues related to investment recovery based pricing on
regional highways yet to be explored. However, some research papers and project
specific reports/presentations from agencies like Asian Development Bank (ADB),
World Bank, Infrastructure Leasing and Financial Services (IL&FS), Federal
Highway Administration (FHWA, US), Victoria Transport Policy Institute (Canada),
NHAI, MOSRT & H and few articles from critics/consultants are found very much
useful.
21
The review of literature is structured in following sections:
2.2 HISTORY OF ROAD DEVELOPMENT AND TOLLS
2.3 ROAD PRICING AND THEORIES
2.4 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES IN ROAD
SECTOR
FINANCING OF INDIAN HIGHWAYS
2.6 PLANNING AND MANAGEMENT OF TOLL ROADS AND
2.7 WILLINGNESS TO PAY FOR TOLL ROADS
The review of literature within above structure is made as below which is useful in
exploring the subject matter in the undertaken study.
2.2 HISTORY OF ROAD DEVELOPMENT AND TOLLS:
2.2.1 Indian Perspective:
Historically LORD RAMA built most critical link between India and Sri Lanka and
since eons, kings and Rishis in Aryavat (old name of Indian civilization) had been
traveling to farthest colonies. The movements imply roads/links were very much
spread over in this country even thousands years ago. Then, the, highway between
Takshshila (now in Pakistan) to Patliputra (now Patna in Bihar) was a major trade
route in Maurya Empire. In 16th century, Sher Shah Suri built a major road joining
Agra (his capital) with Sasaram (his home town) for his administration in north India
across the Gangetic plains and was called Sadak-e-Azam (i.e. great road). This was
transformed in to historical Grand Trunk Road ( popularly called GT), a first of
National highway for India. The GT was later extended by Mughals and British to
cover distance over 2500 kms starting from Peshawar in Pakistan, passing through
Attock, Rawlpindi, Lahore, Wagah, Amritsar, Ambala, Delhi, Kanpur to Kolkatta and
then enters Bangladesh ending at Sonargaon. The GT has continued to exist since
more than four hundred years and now it is buried in some parts under NH-2 between
Kolkatta to Kanpur ; NH-91 between Kanpur to Delhi ; NH-1 between Delhi to
Wagah border. British also developed routes through western ghats.( Wikipedia, the
free encyclopedia 2007). The above reference to Indian Highways discloses historical
existence of linkages to important places available to public as a free service under
22
State ownership. The only mention of tolling in history seems to be tolling the
pilgrimage by Mughals which was removed by Akbar the Great.
2.2.2 International Perspective:
The word ROAD has emerged from Anglo-Saxon word "ridan'' (to ride). Romans
built military highways from public funds which supported long distance traveling.
Roman road network covered 53,000 miles (more than today’s US network of
Interstate Highways and more than Indian NH network at present). Academically
Roman roads are of great interest for technological evolution of road building. But
they were not recorded as tolled road. The road development in UK and then in US
has deep repercussions in recent PSP movement world over.
Unlike India the development of roads in UK and US is more eventful, at least

researched and documented so, to lead to ripple discussions for who shall be
providing this commodity? At what price? Other wise, literature for other countries
mostly narrate recently growing need for infrastructure and initiatives taken to finance
large highway projects through private sector participation which is now in a limited
sense christened as Public-Private Partnership (PPP). A host of literature across the
world is loaded on web sites2, flooded in transport joumals/research reports
explaining inadequacy of State provision to cater to needs of road sector leading to
congestion and bottlenecks in the development! The literature highlights emergence of
facilitating role of state and try to lure the investors in this sector under the auspices of
PPP.
2.2.2.1 History of road development: United Kingdom:
In explaining “The Rise and Fall of Non-Government Roads in the United Kingdom”
the historical evolution of road (highway) provision in UK is nicely documented by
Bruce L. Benson and De Voe Moore (2002) under the argument to prove that roads
had never been public goods. Following excerpts from work of Benson and Moore
(2002) explain the evolution of road sector though at large scale but not really for
public purpose.
23
A “Hundred” unit of local administration (like Panchayats in Indian context)
of Anglo Saxons was responsible for maintenance of very primitive class of
roads during eleventh century.
Following Norman Conquest in 1066 AD, William seized all land of England
and granted use of land to churches for support or to other interest groups for
rent and labors. The local communities were directed to maintain roads as did
under Hundreds and Hundreds were later abolished to facilitate movements of
tax collectors, judges and army.
The churches also required frequent extensive touring and to facilitate

maintenance they promulgated the belief that road caring was a work of
Christian beneficence that pleases God. Churches provided technical and
financial help for the roads. Similarly, merchants felt it investment in
reputation. Thus further period up to fifteen century was handled by voluntary
efforts by local parishes, religious and merchant groups.
English kings dissolved monasteries in. 1536-39 AD in the straggle with

churches and thus affected road maintenance severally. Now the responsibility
was with parishes but without external support hence huge shortfalls in
revenue support occurred.
The Statute of mending of highways (1555) ordered every dweller of parish to

contribute four days in a year with two men labors and tools or fines were
prescribed. Since actual physical involvement of parishioners remained
minimum preferring to pay fines, the local justice of peace (JP) introduced
commutation ( a kind of user fee) and used this money in hiring inputs for
road works. To supplement this, a general highway tax was introduced from
mid seventeenth century. However, the IPs and their surveyors were not
capable of maintaining roads satisfactorily.
During Seventh century, King was collecting tolls on some roads and bridges
for revenue purpose. From 1663, local private bodies were allowed to collect
tolls (at prescribed rates) after approval of parliament and it required annual
renewals. The bodies formed were named Turnpike Trusts. They were allowed
to operate roads for 21 years but all revenues were directed for spending on
roads and for salaries. These trusts were not allowed to earn profits but they
24
could borrow at specified rates if required for operations. This Turnpike
movement started fairly from 1700 AD and there were 1116 Turnpike Trusts
by 1830 operating 22000 miles of roads. However, too many toll booths on a
road irked users and many small trusts were caught in debt trap. Also, toll
levels were lower and inequitable ( steam carriages pay tolls six times higher
than horse carriages and they were prohibited at many places; these
discrimination created problems for steam carriages and Turnpikes but helped
railways) however many groups managed toil exemptions. The rise in
competing modes like rail and water transport and directives not allowing
them to merge/consolidate etc. factors led Turnpikes to a halt and financial
insolvency. Due to Rebecca riots (1842-43) Turnpikes in South Wales were
first abolished, handing over roads to County road boards for toll free
operations. The select commission of the House of Commons (1864)
concluded that toll mechanism being improper and costly all Turnpikes shall
be abolished and roads shall vest with government authorities. Dissolving
20 to 30 trusts per year, last trust ended operations in 1895.
• Now the financing of these highways was costly matter due to increased
industrialization. To ease parishes/counties, central government began grants
in aid in 1876 for maintenance. The counties took over roads completely from
1895 and toll roads were converted in to public authority free roads, financed
by county taxes and central government ftmding. The first petroleum driven
car touched the roads of England in 1894. This was followed by introduction
of national tax on petrol (1909) and hike in central fees for licenses to cater to
increased traffic. The Road transport board was set up in 1918 which became
Department of the Ministry of Transportation after world war-II. This keep
supervising road development and allotting grants from central revenues.
Thus whole evolution of voluntary and then private provision of roads attracted
government intervention causing demise of these non government systems and finally
led to State funded provisions which is still largely in vogue in UK. The myth of
roads traditionally being public goods is shattered herewith and this underpins ability
of PSP in provision of wide coverage of roads even under hostile conditions. But the
signals received in referring this work are apprehensive because if private sector
develops the network, due to established essence of public good, any road or network
can be de-privatized or de-concessioned under public resistance for level of taxes
being paid in this sector or under monopolistic administration of Sovereign. Thus, the
agreement of any road built with private ftmds needs some admonition under such
circumstances for sustainable PSP. In feet, a typical concession agreement covers this
aspect under Force Majeure.
2.2.22 History of Road Development: United States:
The America’s 100+ year experience with private toll roads offers valuable lessons
for policymakers pursuing PPP world over. American toll road history consists of
three episodes: (1) the turnpike era of the eastern states 1792 to 1845(2) the plank
road boom 1847 to 1853 (3) and the toll road of the far West 1850 to 1902. The
historical evolution is noteworthy from work of Daniel B. Klein and John Majewski
(2003) as below.
• Prior to 1790 AD US roads were built, financed and managed by town

governments. New York State demanded minimum three days of roadwork
under road labor tax or worker need to pay a fee of 62.5 cents a day. Needless
to say, the system proved discouraging. But the amendments in constitution
and success of private toll bridges helped in promoting turnpike companies.
• The first Turnpike in US was chartered in 1792 in Pennsylvania for 62 mile

road between Philadelphia and Lancaster. . By the end of 1845, 1562 turnpikes
were incorporated. The stocks of turnpikes were labeled worthless since they
never earned dividends. But the turnpikes were useful in improving land
values and local economy. Hence, the stock holders were farmers, land
speculators, merchants etc.
• Turnpikes raised more than $24 million from 1800 to 1830 from 10 states
which were 6.15% of 1830 GDP for those states. This was quite huge capital
as compared to so called biggest State fended Interstate highway project
costing $ 330- billions during 1956-1995. The Interstate highway investment
was 4.30% of 1995 GDP.
• When compared to a National road which competed with Pittsburgh pike,

private road was found less costly per mile and still better quality.
26
The toll evasions, too many exemptions, most of constructions being on so far
existing free lengths, toll booth location problems, construction of Erie Canal
and railways etc. led to departure of turnpikes and few states went for cheaper
option of timber plank roads.
All weather long time utility and lower cost attracted private companies to
build plank roads. The. financing was done on the lines of turnpikes. But
technical failure of planks eliminated this option by 1865.
The new development in so far untouched Nevada and California needed

roads and it was provided by counties allowing private toll road companies to
earn return of 20% and provided lots of freedom through 1850 and 1853
laws. Due to unsettled communities in the Western parts, community based
voluntary efforts were not seen happening.
Thus, from 1792 to 1902, more than 5000 incorporations were set up and they
operated more than 30000 miles of roads during this century with little or no
support from government authorities. Also, US and UK both were in initial
stages of development and State provision could not do what private initiative
did in managing this sector.
The passage of act of 1899 permitted counties to acquire toll roads with a
sentiment nurtured by the government that toll operations were too inefficient
failing to recognize impact of too much regulations and issues of toll evasions.
Another argument was need for centralized planning of this sector. The
Federal Highway act of 1916 barred use of tolls on highways receiving federal
money and private toll roads were totally relieved by 1920. Thus, era of
freeways prevailed from 1899 to 1990s (i.e. hundred years) in US. To support
the non tolled roads, user-based road transport tax in the form of a one-cent
per gallon gasoline tax was pioneered by the state of Oregon in 1919 and
within 20 years all states had a gas tax. In 1956 the US Highway Trust Fund
was established to finance the federal share of the Interstate highway network
(1956 onwards) and to support other federal-aid highway projects. This fund
derived revenues from taxes on fuel, tires, truck sales and heavy-vehicle use.
Now with edge of technology for road pricing (solving equity and efficiency
27
issues), private toll roads are returning in US and UK ensuring no toll evasions
and no pikes at toll roads to obstruct the users.
Indeed, readings as above for development of the sector itself in these two countries
and then encroachment of Sovereign over developed sector and now both nations in
search of proper PSP are suggestive of some cycle of nationalization and
denationalization. The US case is little variation over UK experience with major
difference being the movement was quite delayed in US. Moreover, British turnpikes
were incorporated as trusts like non-profit organizations financed by bonds vis-a-vis
American turnpikes were stock-financed corporations seemingly organized to pay
dividends. In UK last trust ended operations in 1895 and in US passage of act of
1899 permitted counties to acquire toll roads. All these lessons suggested that roads
can be provided by private initiatives if freedom to act and security from government
encroachment were ensured to private entrepreneurs. And a rhetoric from economists
that government shall provide basic infrastructure (even resorting to foreign aid for
this purpose) to lift a society through early stages of economic growth or market fails
to provide such public utilities seems defeated. The bitterest fact to be concluded from
above review is that any state administration can be safely assumed to be strongest
competitor with coercive power and if not satisfied, can cause demise of PSP.
United States case is further relevant to refer for it's historical Interstate Highway
System that linked all important centers of US and India is having likewise National
Highway Development Project (NHDP) at present.
2.2.23 Interstate Highway System of US:
On July 7, 1919, Dwight David Eisenhower, a army captain and army departed from
Washington D.C. in the military's first automobile caravan across the country. Due to
poor roads and highways, the caravan took 62 days to reach San Francisco averaged
five miles per hour. At the end of World War II, General Dwight David Eisenhower
surveyed the war damage to Germany and was impressed by the durability of the
Autobahn road network against bombing. This inspired for construction of Interstate
highways in addition to existing federal highways. It took two years for approval of
this world's largest public works project. The Federal Highway Administration (FHA)
of US Government provided federal funding of 90% of the cost of the Interstates
28
supported by state contributing the remaining 10%.Design wise, lanes were planned
to be twelve feet wide, shoulders were ten feet wide, a minimum of fourteen feet of
clearance under each bridge was required, grades had to be less than 3%, and the
highway had to be designed for travel at 70 miles per hour and most important is strict
access control. The plan for the Interstate Highway system was to complete all 42,000
miles within 16 years (by 1972.) Actually, it took 27 years to complete the system.
(Rosenberg 2007)
The system was designed as a "pay as you go" system, relying primarily on federally
imposed user fees on motor fuels. Though it is just over one percent of the nation's
highway system mileage, the interstate highway system carries nearly one quarter (23
percent) of all roadway traffic. (Cox and Love: 1996)
Though Interstate system did admit uncertainty for population projections, it was
estimated that population would grow by 63 million to 227 million by 1975 when the
system was expected to be complete. The US population actually reached that level in
1980 and another 55 million people were added by the year 2000, and it appears that
another 60 million will be added by the year 2030. Yet, there does not appear to be
another massive investment to reshape US economy and industry. The taxes do not
seem to be raised to fill the deficits and even Toll projects can not contribute beyond
one fifth of the network. (Dunphy2006)
A brief review of US Interstate network above is a story of a nation stuck up due to

poor connectivity in early 1900s and compelled to take up this project from public
funds (mainly dedicated fuel cess like for NHDP in India) due to just gone through
nationalization of roads in that period. Despite PPP euphoria World over during
1990s, US have no future plan to chalk out next mega Programme either from public
funds or on PPP route. The US Interstate highways have been and will continue to be
a undisputed roll model for nation wide road network programmes with massive
investments for any country e.g. in India ( Golden quadrilateral and NHDP) , in
China (National Trunk Highway System, NTHS) etc. But striking difference between
Indian (or China efforts) and US Interstate system is, Inter State system was purely
state provision blaming deficiencies in private initiatives, these NHDP/NTHS
programmes are desperately inviting PSP conceding inadequacy of state provisions.
Now the irony is these Interstate highways are on the roads to commercialization in
29
want of funds for their future care. Since they were basically built and maintained
from federal funds, States at present face problems in imposing tolls through PSP.
2.3 EVOLUTION OF ROAD PRICING THEORIES:
The arena of road pricing has been explored by various economists for efficiency and
equity in the society. But it has been observed that there is some chaos in framing
consensus for road pricing. The economists do agree to solve highway congestion by
road pricing but beyond this primary insight, there is much disagreement over setting
of tolls, how to cover common costs, what to do with excess revenue etc. Hence, over
a passage of time the questions like -Whom to toll, how to toll and what to do with
toll revenues have perplexed the policy makers and economists as well. Meanwhile
the decisions and administrations in road sector has remained domain of town
Planners and Civil engineers world over.
Over and above, the issue of road pricing drew attraction of many economists world
over but there seems no consensus among them at present for continuing tolling of
roads.
2.3.1 Diverse Views on Approach to Road Pricing:
Lindsey (2006) has produced intellectual history of road pricing idea starting from
Adam Smith and concluded that economists seldom reach to a conclusion on road
pricing. He noted that Adam Smith (1937) devoted several pages of The Wealth of
Nations to transportation projects (high roads). Smith was very near to idea of project
financing and he expected that all such “public works” be so managed as to afford
particular revenue for paying their own expenses without bringing any burden upon
general revenues of the society. Proposing equity, he asked the vehicles to pay for
maintenance in proportion to their contribution to wear and tear to that public asset
and hence toll was related to weight of vehicles. He also cautioned to build such
infrastructure only where it was required by commerce and their expenses too, their
grandeur and magnificence (this was referring to scale of project), must be suited to
what that commerce can afford to pay. He opposed the proposal to take over turnpikes
by Government. He feared that State would grow dependence on toll revenues (cash
cows) and would increase the tolls unduly, encumbering commerce and final
30
consumers however, maintenance may be neglected. Smith had little cautious tone
while private parties are operating toll facilities. He felt that unlike canals, the poor
maintenance of roads do not render them impassable and hence management over
such operations was needed from State.
The literary work of various other scholars is summarized below from elaboration of
Lindsey.
31
Table: H-l
Road Pricing Theories over the Time
S.N. Scholar Thoughts for road pricing
T Jules Dupuit He was a French Engineer and favoured tolls on average cost
(1849) pricing for covering long run costs rather than for managing
efficient usage. He proposed that tolls can be levied to recover
public investment by Government in constructing and
maintaining the facility. The congestion was not the issue of
concern that time.
2 Arthur Pigou He was among first to recommend tolls on public roads to
(1920) remove the congestion. It was suggested to create differential
conditions (making one of them superior) on alternative public
routes to reduce the congestion by use of tolling. The toll so
derived was named as Pigouvian tax and was equal to difference
between marginal social and marginal private costs. The concept
of tolling was meant for efficient use of road facility.
3 Frank Knight He corrected the idea of Pigou by advocating private ownership
(1924) of one of alternative route.
4 Ronald Coase He advocated that only projects likely to pay for themselves shall
(1946) be undertaken. Coase recognized that self financing might result
into some projects not taken up though desirable still he was firm
on his stand. He did not prefer marginal pricing as it required
subsidies for meeting deficits as compared to average cost
pricing which does not require subsidy. However, he expected
some value based pricing while implementing average cost
pricing.
5 William He expected road pricing on short mn marginal cost (SRMC),
Vickrey may require subsidy in case of deficits as compared to average
(1948) cost pricing. He said that random fluctuations in demand shall be
met with responsive pricing (like other commodities) where by
prices are matched to SRMC. He quoted price dynamics for
telephone services to vary charge with time and anticipated
appropriate technology for network wide tolling.
6 Alan Walters Like Vickrey, they individually supported SRMC pricing. They
(1954), looked tolls as a means of efficient usage rather than to finance
Beckmann the project.
(1956)
7 James It was suggested to make available sufficient supply of
Buchanan alternative routes to prevent monopoly power of privately
(1956) operated toll road.
8 Herbert Though he was strong advocate of SRMC pricing, he gave theory
Mohring of cost recovery through SRMC by assuming possibility of
providing road capacity at optimum (it being perfectly divisible
and can be supplied at constant marginal cost) to recover the cost
of such optimum capacity.
9 Gabriel Roth He was a civil engineer in UK. He expected that roads shall be
(1966) controlled by a road authority that behaves like provider of
competitive market. Roads shall be priced like Pigouvian tax but
may recover long term costs.
(Based upon Lindsey 2006)
32
The ideological difference among economists is found regarding application of Short
Run Marginal Cost (SRMC) based pricing for efficient road use versus average cost
pricing for cost recovery. The following conclusions are relevant for this study.
• Idea of average cost pricing was disliked by many for over investments and
SRMC was found too theoretical. Of course, SRMC based pricing may require
host of factors like, demand elasticity, externalities etc. and hence may require
sophisticated technology to inform and apply toll variations in smooth
manners. This is now getting possible using cameras and satellite based global
positioning systems and already in use in UK, US, Hong Kong, Australia etc.
known as electronic pricing.
• Knowing the fact that roads contributes to general welfare (externalities) , it

can be argued that some public funds collected by taxing the road sector and
surrounding real estates e.g. vehicle registration charges, fuel taxes, property
valorization taxes etc. shall also flow into the road sector which can bring in
equity too in pricing instead envisaging fall investments by private sector.
The concept may lead to State equity in a project or a segment of road
hierarchy may be funded through public funds.
• More or less economists are found clung to rationing of road space and then
allowing expansion of network to optimum capacity. (In India, a network
based efficient road use is never envisaged by MOSRT & H or then-
consultants.)
• Even for use of toll revenues, economists diverge either to reduce overall
taxation due to efficient toll collection, to replace some of taxations (e.g. fuel
taxes) by tolling, to plough back all revenues in the same sector (which is
inflexible decision of budgeting in changing priorities) or carry the revenue to
general pool.
2.3.2 Public Goods and Externalities: The Case of Roads
Walter Block (1983) has raised basic issue of externalities as an irrefutable part of
roads as a public good but has stated that market can internalize such externalities
itself. The relevant excerpts are discussed in relevance to undertaken study as below.
33
• Block says externality argument is based upon a distinction between public
and private goods. One claim is that, since provider of road can not reap full
benefits(e.g. spill over benefits of increased land value etc.) private party will
under-invest and there i©a case for government provision or since roads
provide external economies (benefits to communities) the users only shall not
be charged.
• If it is so then providing other services like electricity shall also be made

free/subsidized because they generate similar social benefits to larger interest
of society. Block argues, if taken this way, no area will be left for private
sector enterprise. The issue of externalities is difficult to quantify for
providing subsidy to the actual users of tolled facility by charging the potential
external beneficiaries3.
• An externality attracts attention towards “free riders” who are benefited

without paying for the cost. But since the benefits are spilling unsolicited to
them, it becomes practically difficult to charge. Instead Block suggests to
adjust tolls as compared to benefits reaching to users.
• Another externality is diseconomy seen in case of congestion and invites

argument for state intervention. But Block thinks if antisocial behaviour is
seen on highways (e.g. overcrowding) that is due to visibly non-ownership of
this asset. The negative externalities shall be internalized by pricing technique
so that the losers are compensated from those affecting.
While discussing the “Overcoming Difficulties in Privatizing Roads” Walter Block

(2003) has negated the popular four arguments against the privatization of roads 1.
Eminent domain is cheap, efficient, and necessary, but only government can avail
itself of their “benefits.” 2. Roads are not perfectly competitive, but rather,
necessarily, are characterized by monopolistic elements, which only the state can
address. 3. Roads are different then everything else; people impose waiting costs on
others without taking them into account; this externalities problem is a market failure
that, again, only government can solve. 4. Road privatization is unfair to abutting
property owners. Block sees main answer in that no privatization has actually
occurred to its full capacity and we are in transition. If one allows the privatization to
fullest extent, all the above questions are replied by the process. Thus Block has come
up as a proponent for private sector participation in roads which is supposedly public
34
'good. The world has seen various forms of PSP including private investments through
PPP route amid varying arguments for issue of road pricing.
2.3.3 Regulating Public Utilities: Demsetz Auctioning
In 1968, Harold Demsetz observed that under the argument of- ruinous competition,
excessive duplication and durability of original investment many public utility fields
(including roads) were wrongly insulated from competitive forces. The natural
monopolistic conditions were found being regulated rather than exposed to market
forces. He argued that regulations can not do what a market can do. He expected that
the public utilities shall be exposed to open competition for taking over the field under
natural monopolistic conditions since the bulky scale of investment and scale of
operation will not make it advisable to introduce competition in the field. Hence,
competition for the field (Demsetz 1968) became a motto for installing and
operating public utilities in Europe. In fact, Edwin Chadwick proposed this solution to
the natural monopoly problem in 1859 as acknowledged by Demsetz, the auctioning
and re-auctioning of public utilities are called Demsetz Auctioning.
The auctioning of public utilities referred by Demsetz is basically award of

concession for public utilities like roads. In India, concession for development of
roads are mostly awarded on competitive basis and hence initial auctioning is
essentially Demsetz auctioning but subsequent periodic auctioning is not practiced
during long tenure of concession or during useful life cycle of assets for the purpose
of controlling monopolistic exploitation of consumers/ users
2.4 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES IN

ROAD SECTOR:
The available literature suggests many countries including US have resorted to a

nationwide programme for development of roads. As emerges from country specific
experiences, private sector participation does not relieve Sovereign of financial
liabilities due to some kind of undertaking by virtue of public ownership of roads. In
fact, in a longer run, Sovereign may end up spending more (deferred payment) though
initially private sector bring in required funds and facilities are created under declared
programmes.
35
2.4.1 China: At the beginning of the 1990s, India’s highway infrastructure
was ahead of those in China in terms of total route km, route km/square km, and route
km/head of population. India’s road network was more extensive than that of China in
1992, but the quality, of the road networks in both countries was severely deficient
relative to the standards of modem highways in virtually all dimensions - pavements,
road geometry, and traffic management. The available literature for China is
highlighting massive investment in the National Trunk Highway System (NTHS) and
it is claimed that the programme has helped in removing poverty and boosting
Chinese economy. Ministry of Communications of China has planned National Trunk
Highway System (NTHS) of 35,500 kilometer requiring $ 504 billion from 1991 to
2010 AD The available revenues are estimated at $ 302 billion from road user charges
and $ 29 billion from toll collection, still leaving a financing gap of $ 173 billion or
about $ 12 billion per year. The gap is expected to be covered from better private
sector participation and some ADB assistance. (The massive investments during
1997-2002 made 77% of NTHS completed by 2002)It is to be noted that most of the
private funds have come from foreign investors and little from the domestic private
sector however private funds totaling in last ten years less than 10% of total flow
(Ojiro 2003). The latest up dates of Chinese highways points out over helming
success of their programme. In 1988, China did not have an inch of expressway but
the length of expressways in China was 41,000 kilometers at the end of 2005, the
world's second longest only after the United States. About 24,000 kilometers were
added in 2001-05, or 4,800 kilometers per year. Also, in 2010 the total length is
expected to be around 65,000 kilometers. The United States had some 90,000
kilometers in 2005. The Chinese ministry declares that the plan is to increase the total
length of expressways to at least 85,000 kilometers by 2020 since it helps in pushing
economy up. During the period, some 2 trillion yuan (US$241.9 billion) will be raised
for road development from overseas and private investors (China daily dated 5-4-
2006). ADB (2001) has noted that present Chinese legal and institutional system for
roads is under transition from a State Owned Enterprises (SOEs) to a mixed system. It
is stated to be based on share companies to carry out the socialist market economy,
seeking outside investments by listing on stock exchange. Thus China has constructed
its superior roads at frantic speed but main mode of finance was not BOT. The central
government and provinces continue to advance an expressway program which is
36
almost entirely dependent on equity capital and public revenues without the benefit of
long-term project finance (Stanfield2005).
2.4.2 Mexico: Among Latin American countries, Mexico Toll Road

programme has noteworthy relevance for India as well as for any country planning a
large scale highway investment programme. In 1989, then Mexican President Salinas
announced the National Highway Program for 1989-1994 to extend concessions to
private Mexican entities to build 10,000 miles of modem, high velocity highways.
Between 1989 and 1991, the Salinas administration directed some $4.6 billion of
investment toward road development and improvements nationwide, $3.4 billion of
which was financed by Mexico's private sector through concessions. By the end of
1994, a total of 50 highway concessions had been awarded, representing 3,300 miles
(i.e. 5300 km) of highways and eight bridges (Rusterl997 and Ortiz 2006). The
required investment of around $13 billion was financed through the domestic banking
sector (50%); considerable concessionaire equity (30%), funded through expensive,
limited-tenor, floating rate commercial loans and/or “sweat equity” (an arrangement
whereby a construction company builds a facility on behalf of a concessionaire, to be
later compensated through the reward of an equity stake in the concession); and a
remaining 20% came from public-sector grants/equity. All the lacunae in design of
concession and hasty implementation of programme accompanied by drastic under
receipt of toll revenues marred the commercial sense of project. Meanwhile Mexican
peso (currency) crisis forced the Mexican government to devalue the peso in
December 1994 and by the end of December, the peso had fallen by 66%. GDP fell by
6.2%, and the rate of inflation on a 12 months basis climbed to 52% in December
1995. Short-term interest rates reached a level of 71.5% in April 1995. This crisis
raised all-in interest rates to 100% and affected cash flow of toll projects in deadly
manner. The Mexican Government was forced to assume all the debt obligations and
equity investors lost the equity in winding up the programme. The spectacular
financial failure of this program is legendary and it is used in academic texts and on
finance courses as an important example of what can go wrong with overenthusiastic
large scale, national infrastructure concession programs.
2.4.3 Spain: This is the case of free versus toll road provision with change in
political agenda of Government. In 1967, Government planned for 3,160 kilometers
37
of toll motorways in the Program of Spanish National Motorways (PANE). Up to
1972 the sections were franchised to private firms. The possibility of having
motorways (even if tolled) raised great expectations, and political and institutional
pressures to acquire such roads emerged all over the country (Bel and Fageda 2005).
The PANE was up-dated by 1972, included 6,340 kilometers of toll motorways.
Promises were high, but results did not meet expectations. The concessions were
franchised for total of2,042 kms up to the end of 1975. By 1985, no more than 1,807
kilometers of toll motorways were operating, along with 1,363 kilometers of free
motorways. This is mainly due to economic crisis of seventies that discouraged
private investors to go ahead till mid 1980s. In the PANE, Spain did not prefer public
management (like in France and Italy) but loan warranties were availed to private
concessionaires to obtain overseas funds. But this decision attracted risk transfer on
government for exchange rate on external borrowings. Some or other way likewise
many risks were ultimately passed on to government and ultimately private toll roads
resulted in to a costly affair. During events like oil crisis of 1973 Italy faced less
problems because it followed network based management for balancing profitable and
unprofitable stretches whereas Spain franchised individual stretches. Politically the
decision of choosing model of public financing of motorways for 1984-1991 Roads
General Plan was taken by newly elected Socialist party. The new model really
clicked to produce additional 3600 km freeways between 1986-92. Fiscally this was
seen possible by Bel and Fageda(2005)due to introduction of Income Tax from 1977
and availability of European Community funds on some stretches of European
importance. However, during late 1990s with out competitive pricing unprofitable
concessions were facilitated by renegotiations for increase in term and in return
reduction of toll or investment in such unprofitable stretches. This has resulted in
implementing yearly price adjustment formulae wiping off extra ordinary profits of
private parties through capping. In survival of private toll ways, National Toll
Motorways Program approved by the conservative government elected in March 1996
and 2000 helped without harming development of freeways. Also, it allowed
subsidies for poor traffic stretches on private toll ways. The socialist party again
gained power in 2005 and is likely to downsize remaining of Toll Motorways
Program.
38
2.4.4 US way of long term private sector participation- Most recent
Development:
Samuel and Poole (2005) has discussed recent events of U.S. selling its two toll roads
to an Australian firm. This is in contrast to buying out of 91 Express lanes of
California. The 91 Express lanes contract was terminated and taken over by public
authority to get rid of “non-compete clause”4 of the contract. As per this clause, State
was bound by agreement not to create competitive facility and even adjacent free
lanes were not to be improved with out consent of Concessionaire. Here, the above
report describes one of this US case and some international precedents. Most relevant
content is poor status of public exchequer in advance country like U.S. that forced to
sell its assets. A case of one of these sell out is referred as below. This selling of
public asset explains remote future of well developed PSP ambience. May be some of
the successful toll roads in India at present or after completing original concession
term get sold to such giants.
The 99-year lease of the Chicago Skyway for $1.83 billion has led officials in other
states started asking whether they should examine the privatization of their toll roads
and bridges. It is just 7.8 miles in length and garnering annual toll revenues of $45
million, it is quite down the list in any ranking of US toll facilities. The deal sound
unreal for many but a reality at present as it was achieved on January 24, 2005. The
sale produced the equivalent of 70 percent of the annual city budget for Chicago. The
city used money in paying off earlier debts and creating reserves. Even before the
financial close on the Skyway, Mitch Daniels the governor-elect of Indiana,
announced that 157 mile long Indiana Toll Road would be considered for
privatization (and was sold later).
Chicago Mayor Richard M. Daley explained the Skyway sale: “Running a toll road is
not a core function of City government. And as you all know, the City faces financial
challenges this year and for the next several years.” The Chicago administration did
not reveal reserve price but it was believed around $1 to $1.2 billion range. The buyer
justified the deal because the sky had established traffic history since 1959 ; the
physical structure was good and there was spare capacity for future traffic; free lanes
around were less likely to expand.
39
The authors are in favour of complete privatization and dislike the term PPP stating
that the present form of PPP do not resemble with business partnership and the toll
projects shall be operated like business only. They see private sector can access all
the capital markets and bring equity capital in. Some investor groups have
successfully made local initial public offerings, giving local people a sense of
ownership they can never have with a state toll authority. Only precaution is prudent
use of money from such proceeds.
2.4.4.1 The Chicago Skyway Sale : An Analytical Review:
Enright (2006) has evaluated the bid for skyway reviewing the details of the
transaction, its benefits, costs, risks and other options that would have achieved the
same results. Was this transaction meant for a public benefit or was it a leveraged
buyout for corporate profits? He observes:
• One way, the Chicago Skyway was the perfect candidate for long-term
privatization because the seller state gained all the cash and will pay virtually
none of the costs.
• Even at the assured floor toll rate increase of 2%, the net present value of
increased revenues from tolls alone cover $1.4 Billion or 75% of the upfront
franchise price of $1.8 Billion. Otherwise, if the indexes allow 3% rate
increases then the full franchise fee is recovered from toll increases alone. The
breakeven traffic growth required to recover the franchise fee at the floor of
2% is a meager growth rate of less than 1 % per annum.
• Projected Average Annual Return on Equity based on final Equity Investment

of $652.6 Million after refinancing was estimated at near 6% for minimum
floor increase of 2% with no growth of traffic. This return reaches near 10% if
moderate traffic increase of 2% is also considered. Enright is surprised over
selling of such profitable cash flow instead of retaining it.
• Arguments for sell include- the availability of “patient capital” that could wait
for revenues if they did not develop with out any fixed payment on debt
service; otherwise it was difficult for public sector to raise the same level of
capital due to the restraints associated with an all debt funding. However, the
state could have gone for issuing two series of bonds first to gamer $1.8
Billion and second for paying interests (capitalized portion) and at given
market conditions, Enright see it beneficial to state. The private buyer has
almost gone similar debt financing series but recovering equity within first 12
years in his plan.
The work of Samuel and Poole (2005) along with Enright (2006) is suggestive of
huge potential of long term concession extending over full life of asset and assuring
long term secured returns. US has no plans (like NHDP) to establish platform for
private investment in roads due to heavy dependence on fuel taxes and existing huge
network of Interstate highways constructed from public funds. But the limited cases
of too much of privatization are eye catching for future prospects of PSP world over.
It is also necessary to note that PSP programmes are found world over but not
necessary through private investments. The public investments in such programmes
(through fuel taxes, excise etc.) has remained phenomenal despite every nation’s
aspirations to involve more and more private funds.

FINANCING OF INDIAN HIGHWAYS:
The Indian Highways have seen first ever mega highway programme (NHDP) so far
which has stemmed out of some task force created by GOI. A land mark in this is
infrastructure report by DR. Rakesh Mohan. This section encompasses historical
development of NHDP and related issues.
2.5.1 Major Recommendation in Dr. Rakesh Mohan Committee Report (1996)

on Roadways:
The New Economic Policy (NEP) of the Government of India (GOI) has culminated
in far reaching reforms including fiscal consolidation, trade and industrial licensing
liberation and permitting private sector participation in infrastructure development. In
October 1994, the Department of Economic Affairs, Ministry of Finance, and GOI
established an Expert Group on Commercialization of infrastructure projects under
the chairmanship of Dr. Rakesh Mohan. The highlights of the report are:
• So far connectivity is emphasized and thus rural roads have increased. But
now National Highways and State Highways shall expand in matching manner
41
considering pace of traffic growth. The main roads shall also improve in
quality.
• The inadequate and congested road network has severely eroded the
international competitiveness of the economy and led to huge economic loss
along with higher transportation costs. Commercial vehicles are able to run
only 200-250 km on an average per day as compared to 500-600 km per day in
developed countries. The economic losses due to poor roads were estimated at
Rs. 20,000 to 30,000 crore per year and cost of avoiding these losses were
estimated at Rs. 120,000 crore in terms of improving/building/maintaining
network of National and State highways. It was estimated to provide Rs.
32,000 crore in 1996-2001 and Rs.63,000 crore during 2001-2006 for
construction of NH, SH and Expressways. For these two periods, provision
for maintenance required was estimated Rs. 9000 crores and 11,500 crores
respectively.
• The proper and timely maintenance of existing roads was emphasized heavily
using modem techniques.
• Ribbon development shall be undone and continuous national highways shall

be constructed using bypasses at town junctions. Utility obstructions shall be
shifted out by coordination with local authorities.
• Highway development should be on the basis of corridor development. A 20

year master plan should be prepared. A comprehensive Highway act to
facilitate private projects shall be enacted to serve all India.
• Record says, the road ministries at both levels have incapacity to spend even
the allocated budget money and this is mainly related to use of labour oriented
methods. The contracting industry shall be properly developed and modem
equipments shall be deployed. The administrative delays and problems in case
of NH shall be undone by entrusting sole responsibility of planning,
developing and maintaining NH and Expressways in India to the NHAI only.
Thus, state authority shall be separated out of NH activities.
• All over the world, four sources are used in financing highways: 1. Allocation
from existing user taxes collected as part of general revenue 2. Creation of
earmarked funds through levy of specific user tariffs 3. Through user pays
42
basis by raising commercial and multilateral loans (ADB, WB etc.) and repaid
from tolls collected 4.Private sector participation. In India last three sources
are untapped. Looking to massive backlog, all sources like public, private,
domestic and foreign shall be tapped and a Highway Development Fund
should be created as an assured extra budgetary source of funding highways.
At some parts of world, efforts are made in creating Highway Development
Fund involving three steps: 1. Introduction of road tariffs 2. Depositing
proceeds into a Road fond 3. Establishing a Road Board to oversee operations
of roads.
• It is proposed that a Highway Development Fund be created in India by levy

of a cess of Rs. 0.50 per liter of diesel and Rs.1.0 per liter of petrol; a cess on
automobiles at Rs. 10,000 per commercial vehicle and Rs. 5000 per car and
one percent cess on automobile components. It was estimated that Highway
Development Fund and budgetary allocations will provide Rs. 11,000 crores;
private sector would provide Rs. 10,000 crores; Rs.4,000 crores would be
extra budgetary loans to be repaid from budgets; and Rs.2,000 crores from
tolls and commercial loans totaling Rs.27,000 crores which is estimated fund
requirement for NH and Super NH during 1996-2001.
• Like NSS, a Highway Infrastructure Saving Scheme should be started. All

mega industrial projects should include a provision of 1% of project costs for
highways and money shall go to NHAI
This is a major relevant event for Private Sector Participation (PSP) in the field of
roads and its major role in financing Indian highways. The report is basically on need
based estimation and does not really accounts for demand perspective. However, the
recommendations are the genesis of earmarked fund (at present only fuel cess)
creation and tolls which users pay and thus multiple taxes established for using the
road. The major action taken by GOI is delinking State PWDs from development of
NH sector as suggested by Dr. Rakesh Mohan But this action removed the oldest
player of the game and recently NHAI itself is asking services of experienced
engineers from State PWDs.
43
2.5.2 Financing of Indian Highways So Far And NHDP:
The present level of road pricing and its capacity to finance the Indian highways is
well explained by a World Bank (2004) research report. The WB report discusses
requirement of enabling environment for PSP that is relevant for study undertaken
herewith. The Bank says Private sector participation (PSP) in funding is increasingly
perceived as the answer to highway finance (panacea?) but concedes that
internationally, at most only 5-10% of highway networks have been financed by the
private sector. Thus world over the public funding will prevail for the highway sector
and India can not be an exception. The Bank sees that PSP depends on a sound
framework for overall sector funding. Importantly, public acceptance of tolls may be
partly determined by perceptions of the entire road charging regime. Basically the
WB report is designed to review scope for establishment of efficient and equitable
road pricing under given taxation and user charges on roads. It also discusses scope
for PSP in terms of financing and management of the network The report imparts
interesting statistics on transport sector and present charges on them. The report
seems having two distinct foci (a) focusing on how much the road sector is earning
revenues to the government and what is spent back on this sector, what are the road
use based and fixed costs to the road users in India and how to remove inherent
inefficiencies in these charging regime including looking for equity in charging.(b)
This is more relevant and is about PSP issues under international as well as Indian
perspective. The some of the conclusions / recommendations put up by Bank relevant
to undertaken study area is as below:
1. GOI’s Vision 2021 sets out the investment needs of the Expressways, National
Highways, and State Highways, in ten years 2001 - 2011, estimated as Rs.300,
Rs. 1,200 and Rs.750 billion respectively (1999 prices). Considering the
current proportion of road-user charge revenue is returned (56%), funding gap
is estimated to Rs. 1,760 billion and it is misbelieved that only private funding
can make up the funding gap. In fact this gap will be met from road users only.
Several countries have found that, in order to make additional user charges
acceptable to road users, some different institutional governance structures are
desirable whereby representatives of road users and other stakeholders are
brought into the decision-making process and make some influence on how
their user charges are spent. A Strategic Roads Authority (SRA) is
recommended to be set up in proper gamering of road user charges in
acceptable manner, (e.g. European Conference of Ministers of Transport
(ECMT), and the International Fuel Tax Association in the USA and Canada)
2. There is need to raise user charges and see that heavy vehicles are no further
charged less as compared to Buses and public transport is favoured.
3. The road user charges shall be more in form of direct on use and shall be
separated from being considered general revenues. The tolls shall be decided
on economic principle like congestion pricing, weight-distance pricing or short
run marginal pricing. For recovering investments, fixed costs prevailing under
present user charges may be preferred.
4. Though presently only one percent revenue comes from tolls, it will be a
dominant instrument in coming days. Bank suggests using NHDP as a
proper event to introduce state level and national level tolling schedule
with uniform policy. Though internationally, toll rates are low in India but
probably due to low affordability index, Indians have low willingness to pay
tolls.
5. Like telecom, a Highway Regularity Authority is suggested to be established

and a comprehensive road development policy incorporating various aspects
of PSP is felt necessary for giving confidence to investors. The network
financing and detailed risk sharing calculations shall be work out for viability
ofPSP.
6. Constraints to PSP are- lack of flow of private funds, long gestation periods,
high cost of restructuring, questions for value for money (like, NHAI went for
eight projects under annuity agreements but it cost NHAI at 17-18% while
NHAI has own fund costing around only 11% indicating flaws in preparing
projects), lack of information for investor perspective, lack of simple and
supportive legislative, regulatory and institutional environment for sustaining
PSP. All these constraints and issues like lack of framework for project
identification, feasibility studies, project approval, etc. coordination between
various government agencies involved with road sector projects, absence of a
statutory, autonomous, regulatory authority (at arms’ length from government)
45
for dispute resolution, toll fixation/revision and for ensuring a level playing
field for all participants , delays in decisions regarding government support
(land for example) are required to be analyzed for further improvement in PSP
7. Corporatization and securitization to access the retail equity market is felt one
option for enhancing PSP.
8. The GOI is envisaging PSP in the next phase of National Highway

development with 10,000 km of roads being expected to be funded
substantially through BOT. Bank also sees opportunity at the state level in
varying capacity of private sector and varying % of state support is offered
opening flood gates for BOT.
9. Internationally, most of the countries use revenues from road sector as general
revenue and very less returns back to the sector, (exception is US which
returns back 90%).
10. From 1992 to 2003, globally private investment in highways had a median
value of $4.2 biilion/year and most countries have entrusted less than one-
tenth of their main road network to the private sector. Japan has one of the
longest toll-road networks in the world (9,200 km) Latin American countries
have had the highest share of their national roadway funded and operated by
the private sector (it is 53% ) during 1992 to 2002. Also, two-fifths of the
main roads in Chile, and about a third in Argentina are toll roads with private
participation. In UK, Holland, Norway, Portugal, Poland and the Czech
Republic state pays to concessionaires based on traffic levels (shadow tolls) or
availability of the road i.e. toll volatility is shunned.
11. A recent review of cancelled private infrastructure projects between 1990 and
2001 from around the globe revealed that about 6% of toll roads (mostly in
Mexico and Hungary) were cancelled during this period representing about
16% by value of the private investment in the sector. The main factors behind
these cancellations of toll road projects were misforecasting traffic and flaws
in agreement preparations.
12. A concept of toll pooling to mitigate traffic risk is being adopted in

Switzerland, Germany and Austria where additional network wide weight
distance toll systems recover new funds from the trucking industry. This has
46
better public acceptance. A portfolio investment approach is also used, like
toll pooling where risk is shared among various toll projects of the
concessionaire. For example, as of 2002, Road King Infrastructure Limited
(RKI) of Hong Kong. RKI had a portfolio of 22 toll road projects in China
covering about 1,000 km, mainly operating with joint venture partners for
specific projects.
The need for agency like Highway Regularity Authority is required to be understood
in study undertaken. Bank depicts a host of risks associated with BOT project and
theoretically Bank has recommended who will share what risk and this is interesting
to be seen for selected cases in the undertaken study.
2.5.3 Indian Issues in Infrastructural Investment: National Highway

Development Programme
Knowing the fact that National Highway Development Programme is the

unprecedented massive investment programme for development of (National
Highways and influencing development of State Highways as well) literature on
highways in India is mainly focused on this programme, National Highway Authority
of India (the implementing agency) and related policies. The critics keep on reviewing
so far achievement of this programme and found generally in agreement that the
intentions are very ambitious and appreciable but there is outcry over slow progress
and various implementation issues.
Mihir Rakshit (2006) has provided insight in understanding issues in planning and
implementing NHDP.
The author analyses National Highway Authority of India (NHAI) portfolio and its
operations. NHAFs cash inflows have so far consisted of current receipts like cess,
government grants, external assistance in terms of loans and market borrowings but
mostly dominated by cess plus government funding that explains why capital
expenditure of the Authority has remained modest (around total Rs. 35000 crores for
1999-2006 and Rs. 29,000 crores of it done through cash contracts) so far. The
exorbitant need for substantial increase in investment over the period 2005-15
(estimated Rs. 2,20,000 crores) can take recourse to two modes of financing the
47
required expenditure. The first is market borrowing and the second relying on private
entrepreneurs to invest in highway projects. NHAI does contemplate debt financing of
expenditure on highways. Since NHAI is required to operate under a hard budget
constraint, it has to be ensured that (expected) current receipts are sufficient to meet
current costs on account of maintenance and operation as well as debt servicing. The
Core group (GOI) has suggested limit on borrowings to be set by the Finance Ministry
should be such that debts can be serviced out of the projected cess revenue. The Core
group estimates 67% of investment to flow in terms of BOT (Toll) projects and 14%
in terms of BOT (Annuity i.e. instead of direct tolling, Government pays annuity for
15 years) i.e. a lion share of 81% through PPP for 2005-2015. If likely investments in
already undertaken and committed phase I and II are separated, this share of PPP is
expected to be 98.5% (83.5% in terms of BOT (Toll) and 15% in terms of BOT
(Annuity)) for 2005-2015 (NHDP phase III to VII). Hence the issues pertaining to
PPP (rather BOT (Toll)) are most vital; author addresses issues concerning- the
optimality of the scale and pattern of investment; modes of its financing; options
relating to recovery of costs; and efficiency in project implementation and risk
management. The major arguments are:
• Since the tolls are not mopping up all benefits of a road project, not even user
benefits are fully mopped up, the scale of investments from private sector will
turn out to be socially suboptimal. The profitability criterion will inhibit the
private sector from taking up many projects, socially beneficial. The toll levels
are not set considering economic benefits and that is most important reason in
loss of social welfare5.
• The prospective yield from a toll road will be higher at later stage and this will
have very significant effect on anticipated discount rate by private investors
and hence most Greenfield projects turn out to be unattractive for them. The
author notes that private builders have shown willingness to undertake BOT
(Toll) projects against negative grants6 when the projects are for widening of
existing highways already burdened with heavy traffic and connecting
important commercial centers. But there are few takers for projects in the
North East and relatively backward areas.
48
• The NHDP is chalked out based on social rate of returns whereas PPP is
governed by private returns. But upfront grant being offered by NHAI and
fiscal incentives do help to small extent in attracting PSP. The viability gap
funding is limited by budget constraints on NHAI and the fiscal incentives are
too meager to raise the flow of private funds to socially optimal level.
• NHAI is going against golden rule of public finance which says government
shall meet current expenditure from revenue receipts (cess and tolls) and
capital expenditure from borrowings. NHAI has no borrowing plans and if it
thinks, the Ministry limits borrowings (including annuity payments) such that
they can be serviced out of the projected cess revenues. Absence of deep
private bond market and uncertainties of project outcomes, lumpiness of
project assets tend to raise anticipated private discount rate much higher than
the rate at which NHAI can borrow. PPP in highway construction may have
a number of advantages, but financing is not one of them.
• A network based dynamic tolling is felt necessary which may require some
links toll free for some period.. Also, concession period shall not be too large
otherwise NHAI loses the flexibility in setting tolls. Tolls are not only
appropriate means of cost recovery. Other modes of user charges (in addition
to cess and project land development lease) shall be explored for cost recovery
of road investments. Issues related to cost recovery and financing of projects
have to be resolved for the package as a whole, rather than for each project
separately.
• Efficiency and allocation of risks under PPP seems not designed optimally.
What is lacking is Public Sector Comparator like UK for ex ante and post
evaluation BOT projects. It is suggested to lessen burden of demand risk on
toll projects while for annuity projects, escalation clauses may be added. The
15 % rate of return given for 15 years in annuity projects seems to be baseless.
• Whatever the reason, most people intensely dislike paying taxes—something

which also must be counted as social disutility. It constitutes costs of taxation
and the burden to the society of an increase in government’s current
expenditure which is not covered by an associated rise in non-tax revenue.
49
• If the NHDP is financed by government, the interest savings and cost saving
due to lesser taxes to be collected accrues to the treasury. Considering
conservative estimate of the private rate of discount for highway projects at
15-20 per cent, the gap between the private rate of discount and the
government’s borrowing rate exceeds 8 per cent and the annual saving in
government’s interest payments on account of NHDP 2005-15 would be more
that Rs. 14,400 crores which is illustrative short sighted policies for reducing
fiscal deficit turning up seriously counterproductive.
• One way is for the government itself to supply the required finance to the
concessionaire, but at the market rate of interest so that the gains due to
government’s lower borrowing rate accrue to the Treasury. But it is necessary
that the builder’s own fund (i.e., equity capital) should form part of total
finance and that the government would provide the loan against some
guarantee(s) from reputed financial institutions. The type of financial
arrangements outlined above is in fact similar to the Credit Guarantee Finance
(CGF) used in the UK for funding some of the infrastructural projects under
recent Private Finance Initiative (PFI).
Thus author has apprehension for the socially suboptimal investment in highways
under NHDP owing to flaws in planning and managing this programme. The
emphasis on BOT (Toll) can be understood looking to the percentages of share
expected from BOT projects in overall NHDP and justifies study of BOT (Toll)
projects in the study undertaken.. The arguments for scale of project in terms of
investment and concession period are debatable. Author suggests bundling of projects
and this requires checking capacity of NHAI and private sector if they can handle this
scale? Of course inadequacy of tolls and supplements in terms of user charges (may
be congestion charges?) or credits can be tested for making a BOT project viable.
Author sees, if BOT projects are turning up commercially viable under given risks
and market conditions, the mode selected for NHDP may serve the purpose
considering all the stretches under NHDP are socially desirable. Thus the study under
taken for viability of BOT (Toll) projects can be guiding in pursuing social goals
contemplated in NHDP.
50
V H , - /<■/.■
2.5.4 Potential For Refinancing of NHDP Private Investment A.'
Credit Perspective:
Mukherjee (2004) sees very good possibilities for refinancing the existing debt in case
of private investment toll projects under annuity mode by securitizing future annuities
receivable from NHA1. Mukherjee expects some of the annuity projects scheduled for
completion to come up for refinancing shortly. In annuity projects, concessionaire
takes on the construction and Operation & Maintenance risks but market and political
risks are underwritten by NHAI. The concessionaire is paid for 15 years by the Nil At
annually at agreed sum hence there is a secured stream of cash inflow.
Since the refinancing of existing debt would take place after completion of
construction, the new debt investors would not be exposed to completion risks. The
NHAI has put some fair requirements for carrying out O & M works and thus new
investors are exposed to performance risk on O & M. Since these are all experienced
builders and O & M requirement are modest, this risk is negligible. However, ICRA
suggest appointment of a trustee to see that annuity does not suffer on part of O & M
norms. Also, to deal with flaws if any, in design of main work (which will heavily
increase O & M) the trustees shall be allocated more funds for O & M.
Second is counter-party risks associated with NHAI. In Mukherjee’s opinion, the

counter-party risks associated with NHAI for its ability to meet the contractual
annuity payments over a 15-year period, are very low looking to meager size of
annuity projects and huge funding from cess, tolls, support from multilateral agencies
etc. The following clause of concession agreement is relieving original lenders
(mostly commercial banks) -Where there has been a default by the concessionaire, the
termination payment would amount to 70% of the book value of the assets as on the
termination date. If there has been a default by NHAI, the termination payment would
amount to the discounted value of future net cash flows, determined on the
termination date. Mukherjee hints at availability of a “reasonable” surplus to be
generated from operational cash flows for the new debt investors; from reduction in
the amount of debt raised; from the building up of an up-front cash collateral/debt
service reserve account, or from external credit support like bank guarantee/stand-by
Line of Credit. Apart from the high leverage, interest rate risks could affect to these
si
transactions. Hence, Mukherjee suggests a fixed rate debt structure for such
transactions to improve credit quality.
This is good reference ,to see credit perspective of refinancing which is in this report is
for annuity mode. Looking to cash flow problems and risks with BOT (toll), if the
annuity mode is taken up on larger scale, the refinancing from all the perspectives as
above will not be attractive for new investors. Any way, the annuity mode is not a
favoured business since the mode does not distribute the risks to private investors for
utilizing efficiency of PSP. Though the above paper attempts to evaluate the credit
quality of transactions under annuity mode but the concept is equally applicable for
BOT (toll) projects if the project reaches to stable cash flow after initial cashflow
deficits. The undertaken study is intended to link up such refinancing with some
renegotiations of contract (e.g. toll rebates) for stabilized BOT (toll) projects.
2.6 PLANNING AND MANAGEMENT OF TOLL ROADS:
Literature regarding tolling of road facility and financial implications for investors as
well as planners is covered in this section. Here, the issues related to project
formulation and project management are explored at micro level.
2.6.1 Evaluation of Financial Viability of BOT Transport Infrastructure

Projects:
In Indian perspective, structure of a BOT project with various factors of concern for
planners of private sector participation in roads is nicely discussed by Esther (1997).
She enlists uncertainties and hence the risks associated with surface transport project
and present a stochastic simulation model for evaluating a proposed hypothetical BOT
project. For simulation, basic inputs are: policy parameters (construction period,
concession period and toll rates and these are endogenous to project), macro
economic indicators (interest rate, discount rate, inflation rate, D/E ratio, traffic
growth rate these are exogenous to project) and stochastic variable (construction cost,
maintenance cost, operation cost and traffic volume). For a given data of policy
parameters and macro economic indicators, financial indicators namely NPV, IRR
and PBP are found out by random selection of stochastic variable assuming they are
random variables. NPV and IRR are derived for 150 to 200 simulation runs (Monte
52
Carlo Method) for various values of stochastic variables. A sensitivity analysis is also
performed assuming change in one of policy or macro economic indicators. This
study is expected to give most useful risk profile for the promoter and sponsor of the
BOT project.
She concludes: 1. while evaluating BOT project, in addition to threshold values of

financial indicators, cash flow (liquidity) adequacy shall also be checked. 2. The
simulation results derive most important conclusion that unlike public sector projects
time overruns can prove fatal for the financial viability of the project.3. Determination
of toll structure is a complex task as it is a trade off between user acceptability and
financial viability of the project. Toll-traffic elasticity plays important role in making
of NPV and IRR.
She has extended the conceptual simulation model to incorporate impact of corporate
tax, Debt service terms and D/E ratio on financial viability of BOT Projects in a
separate paper. The same hypothetical case study with little changed input data is
discussed in this separate paper (Esther 1998).
The period of writing this paper (in fact it is based on own Ph D work) is around
yearl996 when BOT was a strange word for road sector. She has relevantly explained
various operational theoretical aspects of BOT project and assessed factors affecting
viability (NPV, IRR and PBP) of a BOT project. The BOT projects are now more
structured since feasibility studies are undertaken and conditions of concession
agreement are often modified to suit to site conditions. A major new aspect now a day
is definition of tollable traffic which is quite project specific. It is different than
observed traffic before taking up project and hence alters traffic census based viability
of project adversely. The leasing of tolling rights, income from development rights of
project area, grant support/negative grant and fees levied on revenue on individual
project basis, inelastic supply of road space as compared to need of growing traffic
leading to congestion, toll capping/toll compensation etc. affect viability quite big
way. These aspects were not envisaged by Esther in her study.
53
2.6.2 Traffic Risk In Start - Up Toll Facilities:
Standard and Poor’s research (2002 and updated in 2003) on traffic risks in a privately
financed road project depicts problems with forecasting of traffic and credit
implication of such projects. The authors caution bond holders and lenders to check
traffic forecasts in terms of some parameters identified in this paper while analyzing
cases of 32 toll roads. The excerpts are:
♦ Out of 32 projects, 28 overestimated traffic (overoptimistic) and only four

underestimated (in case of shadow tolls mostly). On average traffic volumes
were 70% of predicted. A Traffic Risk Index is suggested for evaluation of
such project prospects. When an update (2003) was made increasing sample
size to 68 case studies then also the mean of actual to forecast traffic ratio
remained around 70%.
♦ Level of toll tariffs and subsequent adjustments, misunderstanding
willingness to pay, recessions and macro economic growth, particularly lower
turn out of trucks, future land use plans actual time savings, information of
existing and planned toll free options, tolling history/culture, scale and
duration of ramp up period/ catch up period, who has prepared forecasts
(sponsors or lenders), is it toll on point of use or shadow tolling, forecast
horizons (shorter the time horizon , more reliable predictions), toll payment
mode used etc. and hence it is not merely mathematical exercise to fore cast
based upon past trends on then un tolled conditions.
This is guiding research work intended for investors who generally get carried by
traffic forecasts published in the prospectus of toll projects. The authors also expect
the planners to develop case wise models taking above aspects in mind. The most
important aspect discussed in this work is “Ramp Up” period. Ramping up of cash
flow of a toll road to stability during initial few years is most cumbersome that affects
viability of the project. This is the period where issues of guarantees surfaces to
survive the condition of lower than expected traffic and fixed obligations like debt
servicing.
54
2.6.3 Renegotiation of Infrastructure Private Projects - Key Aspects:
Since toll roads are much complex projects than cash contracts (where payment is
linked to predetermined milestones in civil construction work), often the there is
conflict of interests between project sponsors and concessionaires leading to dispute
and sometimes termination or renegotiation of contract. This section is most vital for
understanding sustainability of private sector participation in roads. Guasch (2004)
has explored issue of disagreement over agreed terms while actually managing the
contract. Guasch’s main objective in his work is to aid in the design of future
concessions/regulations and to contain the incidence of inappropriate renegotiation.
He explores the aspects of the concession award process, the contract design, the
regulatory framework, and the overall governance structure and their ability to drive
the success of any reform effort and the likelihood of contract renegotiation.
Guasch has reviewed over 1000 concessions mainly executed in Latin America and
Caribbean region during 1985-2000 for various infrastructure facilities including
roads (276 number were for transport sector) mainly dealing with the regulatory
risks.
Guasch argues:
• Often investments in infrastructure are sunk costs, that is, costs that cannot
easily be recouped or salvaged if the economic atmosphere deteriorates. After
investments by private initiative, high sunk costs may tempt governments to
behave opportunistically, taking regulatory actions that expropriate the
available quasi-rents once costs are sunk. This. can discourage potential
investors from investing, or an additional premium is required. That possibility
is the main source of regulatory risk, affecting levels of investment, costs of
capital, and tariffs, because additional premiums are required to cover that
risk.
• The government, however, is not the only entity that may behave
opportunistically. Once an enterprise has been granted a concession or
franchise that enterprise may take actions that “hold up” the government, for
example, by insisting on renegotiating the regulatory contract ex post, or by
55
regulatory capture to extract super normal rents from the users, to the
detriment of efficiency.
• The 30% of total sample of 1000 concessions were found renegotiated. For
individual sectors, it is observed that 74% of concessions in water and
sanitation works and 55% of transportation projects were renegotiated. But in
case of more competitive sectors like telecom and energy this was in lesser
extent. Though the concessions were awarded after competitive bidding, the
renegotiation was not done so. The 85% of renegotiated concessions
underwent renegotiation within first four years after award of the work (that is
observed for total samples) and this average for transportation sector was 3.1
years after award of work.. Almost 75% renegotiation was related to
investment obligation on the part of operators. When the bids were focused on
lowest tariffs, almost 60% went for renegotiation. The occurrence of
renegotiation was 46% for concessions finalized with competitive bidding and
this was only 8% for directly negotiated bids. The 56 percent concessions
were regulated through a price-cap regime and about 20 percent of the
concessions were regulated through a rate-of-retum regime, while about 24
percent had a hybrid regime. Based on these pricing regulations, the
concessionaires were leading in demanding renegotiation in 83% of cases
when the pricing was based on price cap. The Government was found leading
in demanding renegotiations in 34% of cases when pricing was based on rate
of return. In hybrid pricing, concessionaires demanded in 44% of case to lead
the renegotiations. In total samples, concessionaires requested renegotiation in
61 percent of cases, whereas Government initiated renegotiations in 26 percent
of the cases. In the remaining 13% of cases both the concessionaire and the
government jointly sought renegotiation. Mostly, the operators managed to
fetch commercial benefits as an outcome.
The high incidences of concession renegotiation are attributed to weak regulatory

governance, politics (political cycle and opportunism), flawed contract design, and
external shocks. The requirements for a successful PSP for any infrastructure project
are concluded by author as:
4
56
• Competitive concession award process
• Proper concession design
• Proper regulatory framework
• Proper sector restructuring
• Regulatory credibility
• Clear rules for and limits to government and regulator discretion
• Respect for and enforcement of the sanctity of the bid at the time of the
auction
• Minimal opportunities for frivolous and opportunistic renegotiations
• Dissuasion through financial incentives of opportunistic renegotiations and
development of a credible commitment to the non renegotiation of
opportunistic petitions
• Costly unilateral changes of the agreed-upon contractual terms of the
concession
• An incentive-based regulatory framework
• Appropriate regulatory and antitrust legislation
• Autonomous regulatory institutions, well-trained and well-compensated
professionals, and effective enforcement
• An appropriate set of regulatory instruments, such as a regulatory accounting
system, cost and financial models, and benchmarking referential data
• Competition in the provision of services in as much as it is feasible.
Harris et al. (2003) have reviewed cancelled private infrastructure projects that is
similar to above work of Guasch, briefly reviewing cancelled infrastructure projects
based on PSP during 1990-2001. The developing countries rushed towards PSP from
1990s and during 1990-2001, 2500 projects reached financial closure attracting
US$750 billion for various area of infrastructure. Only 48 projects were cancelled
among them but 15 of them were from Mexican toll road programme. The water and
sewerage projects confronted controversies over price increases and collection from
consumers as earlier public run systems were charging very low and had poor rate of
recovery leading to cancellation of projects. For toll roads, traffic forecast were fatally
overestimated and it worsened the viability when users showed less willingness to pay
and alternate free roads were overused. For example, more than half of the Mexican
toll roads reached less than 50 % of the forecasted volumes and some guarantees
57
offered by Mexican government led to selection of those roads which were otherwise
unlikely to be selected. The authors however see the proportion of failure a meager
one, since many others have survived by renegotiations and expect better prospects
for PSP.
Engel et al. (2001) suggest a renegotiation-proof criterion: the least present value of
revenue (LPVR), an extremely attractive mechanism that awards concessions to
bidders who submit bids with the LPVR. Under this approach a concession agreement
has a flexible end point that comes when agreed level of revenue is secured. Any
event that leads to a shortfall in revenues is automatically handled by extending the
length of the concession (which may not be acceptable to financiers) and is suited to
concessions in which service quality does not affect demand, as. with roads, bridges,
and dams.
The work by Guasch (2004) Harris et al. (2003) and Engel et al. (2001) guides to
accept scope of renegotiation as eminent for concessions granted on road projects. As
seen above, the renegotiation could be taken up from either concessionaire or
Government. In the Indian context, concession agreements provide steering group
mechanism to sort out such issues with out resorting to legal proceedings. The
steering group is consisted of one member each from State and Central Governments
and one from Concessionaire. The Indian concession agreements also provide further
steps of dispute resolutions where claims and counter claims are settled through semi
legal proceedings. Though de jure renegotiations for concessions is not yet known in
Indian literature, many BOT projects are under various steps of such mechanism as
found from discussions with State Government and NHAI offices. Any renegotiation
or reference to dispute resolution mechanism is indication of change in working
conditions that are not covered under agreement and basically they are indicators of
incomplete contracts.
# 2.6.3 Operation of Toll Roads, Bridges and Tunnels in Selected Places:
Lam (2006) has made a desk research study of five toll projects selected in
consideration of the special features of their operations, particularly the toll
adjustment mechanisms and forms of ownership. The study covers aspects like-
background of the project; terms of concession and the mode of private sector
58
participation; financing of the project; toll policy, toll rate levels and adjustment
mechanism; cap on profits or rate of return (if any); financial performance and
financial reporting; and dispute resolving mechanism and re-negotiation framework
(if any). Lam is neither deriving any generalized policy implication nor giving any
analytical inferences but provides good cross sectional comparative analysis of
selected five toll projects in terms of planning and management issues.
Among these five cases, three are briefly referred hereunder. The first case is about 91
expressways in California (US). It is found most referred in literature as a case of
renegotiation by State to protect public interest (reflecting public nature of roads) just
because of a clause embedded in agreement that prevented improvement of free ways
around expressway for protecting commercial interests of private concessionaire.
After taking over by public authority in January 2003 (private sector had started
tolling in December 1995), the expressway has remained tolled continuing tolling
based on congestion pricing. Basically , all of these cases are evidence of various risks
O'
borne by private sector under agreed set of conditions for that project.
Similarly, second case of The Dulles Greenway of the State of Virginia (US) is also
interesting to refer. The main feature of the project is it is initiated by a group of
private entrepreneurs based on area development potential but with out area
development rights. In absence of "non- compete" clause, and recession in Virginia
hampered early years of operations leading to refinance the debts and temporary
slashing the toll rates to half in 1996. After two refinancing, the increased project debt
also pushed concession term from 2036 to 2056. Lam has observed that project has
not yet seen any profit but is estimated to make after 2010. This project is classic
example of private enterprise in green field conditions taking up project risk7 with out
guarantee on returns.
The third case of The Eastern Distributor in Australia is a six-km expressway

including two tunnels and mostly three-lane in both directions which is built keeping
Sydney 2000 Olympics in view, on a Build-Own-Operate-Transfer (BOOT) basis.
The project was financed by over AUS$500 million of tax-free infrastructure bonds.
The main feature is, apart from the construction cost, Concessionaire must pay Public
body concession fees in accordance with a schedule (an annual fee of AUS$15
million payable for 24 years starting from 1997 wherein some installments can be
59
deferred until reaching a specified level of return and an annual cash payment equal to
10% of its cash surplus for the remaining term of the 48-year lease) in lieu of the right
to levy tolls. This was possible due to estimated high potential of project. A feature
that generated criticism was regarding increase of toll rate at 1% every quarter of year
or increases in inflation which ever come higher.
All five cases are reflection of current PSP practices world over and main lesson is, a
contract between Government and private investor is most likely to meet various risks
specific to project and Government is likely not to behave like business partner owing
to public nature of roads.
2.7 WILLINGNESS TO PAY FOR TOLL ROADS:
This is most critical part of study on toll roads since every country is envisaging users
to pay for use though reforms required concurrently are still pending. The concept is
derived from classical theories of consumer surplus and establishing savings to road
users (Heggie 1972). The viability of any toll project hinges on fulfillment of this
aspect overcoming political risks during the long period of toll operations.
2.7.1 Willingness To Pay for Access Control Expressways:
Senbil & Kitamaru (2004) take changes in consumer surplus into account and
describes compensating variation (CV), which is the amount of income that an
individual is ready to pay to keep his utility as it was before a change; the other is the
equivalent variation (EV), which is the money individual is ready to accept alongwith
low level utility. They are termed as willingness to- pay-WTP (to attain the gain) and
willingness-to-accept-WTA (to accept the non-occurrence of the gain) respectively. In
this study, they try to estimate willingness-to-pay for expressway service by using a
stated preference survey8 with hypothetical settings. It is a part of large size
congestion pricing survey for users of the Hanshin Expressways network wherein
some hypothetical questions were asked. The respondents were asked to choose
between a toll road and surface streets with different travel times (duration) and travel
time variability. The stochastic regression analysis confirmed existence of
concealment of WTP, i.e. difference between real WTP and reported one. Secondly,
WTP for expressway was found structurally changing with risk level on the surface
60
streets. Also, commuters who use the expressway daily, value the use of it higher than
less traveling respondents, females appreciate it better than males.
2.7.2 Estimating Willingness To Pay with Random Valuation Models - An

Application to Lake Sevan, Armenia:
Basically willingness to pay surveys are found having genesis from study of
Environmental economics. But they are used by transport planners also using same
conceptual framework in framing of questionnaires of such studies for roads. Wang et
al. (2004) have presented a case study of willingness to pay (WTP) estimation using
random valuation models. A contingent valuation survey is presented for the
estimation of WTP for people of Armenia for the protection of Lake Sevan. An open
ended, closed ended and stochastic payment card (SPC) approaches with split random
sampling is tried and the results are used in constructing WTP models with
heterogeneous errors. It is concluded that the SPC approach produces a higher result
than others viz. open and closed ended while latter both produces similar results.
Also, the mail surveys were found estimating higher WTP than with personal
interviews.
Both of these studies referred above are useful in exploring user’s preferences in a
road development project undertaken on direct tolling basis. As seen in above
literature, the preferences and their attributes are statistically verified for their
significance in explaining WTP and it forms basis of acceptable policy framework.
2.8 CONCLUSIONS:
The review of literature is concluded with following observations.
initiative which saw demise on the eve of nationalization of roads. The
diminishing financial capability of Governments (including US) has brought
back private sector participation in development of roads world over. But
present investment needs in road sector are unprecedented and two important
61
aspects of PPP namely viability of private investment projects and public
acceptance of road pricing are most important for planning and managing such
projects. The externalities associated with roads create many issues in
regulating private provision of this public utility.
2. The PPP for any road project is long term investment made by a private
investor assuming certain risks under given set of conditions of agreement
(representing role of government) and since the returns are directly linked to
road users, the interface with public (representing role of public) forms very
important third dimension of this process. A basic requirement for a successful
toll road project is that it should attract sufficient traffic (establishing traffic
worthiness) so that project benefits will exceed project costs. But the traffic
for the future is never projected reasonably and hence all three pillars of PPP
i.e. private sector, sovereign and users suffer in such projects.
3. The uncertainties attached to the long term concessions of public utilities
attract high rate of renegotiations instead of cancellations. The Government
also initiates such renegotiations but in all the cases the concessionaires
generally snatch good financial benefits.
nation wide programme is discouraging and suggests about 10 % of privately
financed toll roads.
5. The literature review in general leads to conclude that the objectives of study
undertaken are very much contemporary and Indian PSP aspects at planning
and management level of road project are worth attending. The anticipated
mega level private sector participation under the lovely term “Public-Private
Partnership (PPP) ” for development of highways specifically by Central
Government of India (including NHAI) is very much in congruence with
international thrust for similar action in respective countries (including
affluent nations) which is perhaps late in this country.
To enter the very arena of study, next chapter explains frame work of PSP in a limited
case of basic tenets of PPP and thus design of Concession for road project. The
Concessions were developed and explored by European countries and hence
62
international experience of PPP is also explored to build up understanding of
Concession based road projects.
End Notes:
1. Under Build- Operate- Transfer (BOT) format, a private entrepreneur not only
builds the road/bridge with own funds but extending the role beyond a typical
construction firm, he also recovers investments through users’ charges on
agreed terms. In such projects, mainly the risk of earning through tolls under
uncertainty of traffic is key aspect for bidding except in cases wherein returns
are assured.
2. The subject matter search made on Google.com for Public- Private Partnership
(PPP) in highways (roads), Private Sector Participation (PSP) in highways
(roads) or Toll Roads lists enormous literature and farther linkages on the
subject.
3. How ever, the present approach of consultants engaged in PPP in India
allowing toll rates based on two third of savings to the users owing to
improved service level of a facility and involvement of public funds up to 40%
of project cost seems working on this concept. In this case, the share from
externalities for project cost is believed to be covered under involvement of
public funds or through general taxation. A best remedy that can be suggested
would be applying zonal or corridor development' approach which will spread
the cost and benefits over a wider group of population.
4. Such clause is like support agreement for not creating any competing facility
that can attract tollable traffic of concerned concessionaire. It is however
noteworthy to mention that many concessions in India are still having such
"non- compete" clause but without mechanism to compensate if such case
arises.
5. This argument by Rakshit seems like externalities discussed by Block (1983).
6. The negative grant means bidder of a BOT project offers some share of
anticipated profit in lieu of right for concession which is unusual since PPP is
always discussed for some viability funding or agreement support like no
parallel free routes shall be developed during tenure of concessions. The
63
recent example is Six Lanning of Vadodara- Bharuch stretch of 70 km on NH-
8 where L&T bagged the BOT project at estimated project cost of Rs.660
crores with concession period of 15 years (i.e. up to Year 2021 including 2.5
years of estimated time for construction) offering negative grant of Rs. 471.0
crores.
7. The project is designed with estimates of benefits to users and with
assumption of takers of such benefits. Here, the area influencing the
commercial viability of project did not pick up. expected growth and thus
traffic was not generated to expected level. A similar case is found in State of
Gujarat where considering development potential of Dahej port area, State
PWD put up a BOT project for bridge (year 1999-2000) in lieu of level
crossing on a State Highway. The PWD had no role to accelerate or influence
the development of Dahej port neither it was within purview of
Concessionaire. The Concessionaire could not recover investment within
stipulated toll period due to delayed development of Dahej port. Now actually
Dahej picked up, State PWD has taken up (2007-08) four lanning of complete
stretch including that bridge connecting Dahej with NH-8. Again the recent
project is not sharing any project risk or traffic risk.
8. State preferences & Revealed preferences are two specific type of surveys
performed in assessing willingness to pay for a commodity/service wherein
first case is applicable when preferences are straightway asked in monetary
terms as they are quantifiable. However, both cases actually belong to
Environment Economics wherein subject matter is not a market commodity.
64
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69
CHAPTER-III
PRIVATE SECTOR PARTICIPATION: DESIGN OF

3.1 INTRODUCTION
3.2 SPECTRUM OF PSP
3.3 PUBLIC-PRIVATE PARTNERSHIP: A CHANGING DELIVERY

SYSTEM
3.4 PUBLIC-PRIVATE PARTNERSHIP AND CONCESSION DESIGN
3.4.1 Definition of PPP
3.4.2. Concept of Concession for Road Sector- A Deliberate Monopoly
3.4.3 Concession Agreement: Structure and Design Issues
3.4.4 PPP Development across the Continents
3.5 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES-

EUROPEAN INNOVATIONS IN CONTRACTING PRACTICES
UNTAPPED IN INDIA
3.5.1 Best Value Procurement
3.5.2 Performance Contracting
3.5.3 Scope for Confidential Discussions
3.5.4 Europe Financing Highways
3.5.5 Payment Mechanisms In Case Of Concessions
3.5.6 Outsourcing Based Government Agencies
3.5.7 Concept of Early Contractor Involvement (ECI) in UK
70
3.5.8 Prequalification Criteria in Europe
3.5.9 Public Information System during Construction
3.6 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES ON

CONCESSIONS
3.6.1 Use of Concessions in Portugal for Strategic Road Development

Plan
3.6.2 Use of Concessions in France for Strategic Road Development Plan
3.6.3 Spanish Concession Practices
3.6.4 Private Finance Initiative of UK
3.6.5 PPP in Latin America and Caribbean countries
3.6.6 PPP in Asia- Chinese Experience
3.7 CONCLUSIONS
71
CHAPTER-III
PRIVATE SECTOR PARTICIPATION: DESIGN OF

3.1 INTRODUCTION:
Regardless of strength of economy of any nation, private investments on long term

partnership basis seems surfacing in the Private Sector Participation policy of all
nations from 1990s for investment in development of infrastructure and highways in
particular. The pathetic financial condition of every country not meeting with growing
road sector requirements and political cul-de-sac on raising taxes has compelled the
government world over to spread red carpet for private sector participation on the
financial front per se. In fact it is the private sector who really builds services in any
case.
Narrowing to road sector, every country has its own public body made of Engineers,
planners & designers but real execution always vests in private contractors/builders
who produce the goods and get paid off on predetermined terms for the finished
product either at various milestones or at completion under state control. Now the
public body is expecting that private parties shall make all upfront investments and
earn return on investments like a manufacturer sets up production unit and sells his
product/services. It is not a case of delayed payment to private sector since the
amount of payment is not linked with production of goods. This is also not a case of
privatization where public body divests from assets for ever but this is partial
application of market based approach. The public sector is not losing eminent domain
and the property rights are maintained by them. Rather it is risk-reward relation
between public sector and private sector and their common client is Public (road
users). The public sector is buying services during partnership period instead of
buying assets for the users and users are paying directly to private sector or through
public sector for actual usage of services. It shall be clear that it was public who had
paid for infrastructure in absence of PSP/PPP (may be inequitably) & now under the
guise of PPP, at the instance of sovereign, private sector is encountering public
directly on use point.
In this chapter, international practices of PSP in general & PPP (i.e, where long term
private financing is involved and contractually concessions are granted) in particular
72
are explored. Many countries have chalked out programmes for PSP and their
experience for viability of such programmes & innovations are useful guide to design
concession for a road project
3.2 SPECTRUM OF PSP:
There are some PSP models where no financial leverage of private funds is involved
e.g. plans/estimates/designs/' tenders are got prepared from private consultants;
supervision is handed over to third party private independent engineer; testing is got
done through private Quality Assurance firms. This is like trusting private sector in
job works and availing independent witnesses to the contractor of cash contract for
providing fair conditions of contract administration. In India, State Public works
departments & NationaTHighway Authority of India are using consultants for project
formulation, Site supervision and quality assurance/audits in case of EPC. For toll
projects also, they use such consultants as required with restricted scope. But world
over, financial constraints are converging PSP into PPP wherein like Government, a
private party invests in the road project and aspire to win financial returns whereas
economic returns are. anticipated by Government. Now to meet such different goals
through a common platform, a contractual, commitment is exercised between
Government & private entrepreneur which safe guards diversifying interests of both
these parties. The spectrum of PSP modalities in increasing order of risk transfer to
the private sector is practically found taking forms as below and same are explained
for Indian practices:
a) Maintenance Contracts — The private sector repairs an existing road under

performance specifications, to the extent directed by State representatives for which it
receives payments from the government. In Indian context, this is routine periodical
patch work or resurfacing work generally taken up in piecemeal manner within
available funds, may be starting from few thousands to few lacs of rupees. It is a
routine contractor’s job of a week or maximum a month. Practically, the contractor
invests upfront and is paid after the State’s representatives certify the quality &
quantity. A practice of yearly maintenance contract/annual maintenance contract on
performance specifications basis is yet to be established.
73
9
b) Turnkey Contracts — the private sector designs and constructs a new road, to
government specifications, and receives a fixed payment on completion. It is a cash
contract on larger scale getting up to crores rupees. The designs though done by
private sector, it is to be approved by concerned government body. The construction
also needs time to time certification for quantity & quality from concerned
government body to its satisfaction. If the design involves technical risk &
construction involves high costs, (not yet defined by Indian Government at any level
but generally above Rs. 5 crores) government now a days generally thinks of
appointing Independent Design Consultant to prepare estimates/designs/bid
documents etc preparatory work (hitherto this job was performed by employees of
public body) and then to verify & approve designs of selected private party; separate
Independent Engineer to oversee and certify the work; Independent Quality Auditors
for quality assurance though quality & quantity are to be ensured as per contract by
private party which is awarded the job. These kind of large turnkey projects are also
candidates of toll projects (toll may be collected by state or private party).
c) Operation (tolling) and Maintenance (O & M) Contracts— the private sector

maintains the road to agreed standards, and collects tolls from users which finance the
maintenance. This is common practice followed by NHAI on completed four lanes
and permanent bridges; contract is mostly on yearly basis.
d) Rehabilitation, Maintenance and Operation — the private sector undertakes

major rehabilitation works (like foil depth repairs to road crust or major repairs to
bridge/ drainage structures etc.) to bring the existing road to agreed standards,
maintains it to those standards, and collects tolls to finance both rehabilitation and
maintenance. This is a variant of O & M contracts but its costs can be in multiple.
e) Build Operate & Transfer (BOT) — the private sector undertakes and finances
design, construction, tolling, and maintenance, usually of large infrastructure projects.
The private sector can also bear much of the risk — depending on the negotiated
concession agreement. This is though very slowly adopted but thought of major
source of financing NH and state highway projects in India. As per project specific
variations, Build Own Operate & Transfer (BOOT), Build Transfer & Operate (BTO)
etc. forms are in practice for highway projects. In the practice & literature, PPP stands
for BOT/BOOT form of agreements where original construction (other than
74
maintenance) is involved and hence it has huge project cost and longer tenure. The
BTO is very rare and not yet entered India, so BOT/BOOT is relevant contract forms
for study under PPP. Though financially it is quite diverging, BOT/BOOT projects are
also awarded on annuity basis where in India, 15 years of annuity is offered in bid
document and bidder shall bid for lowest annuity. Since such projects are taken up
where no investment potential is foreseen by private sector, it is basically a cash
contract with deferred payment.
f) Corridor Management Contracts — the private sector undertakes new

construction and the maintenance (or rehabilitation) and operation of existing
facilities. It allows government and the private sector to consider the roads on a
corridor or network basis. This is very costly derivative and now GOI is thinking
developing busy corridors like Delhi- Vadodara- Mumbai. On a smaller scale,
Expressway project between Vadodara- Ahmedabad is doing it for safe guarding
smooth flow of main traffic by network of interchanges at major junctions. It is matter
of area planning and requires development & encouraging other allied commercial
activities on corridor; may be allowing leasing of huge land around the highway. This
is in fact giant version of modality (e).This form of PPP can also be visualized as
comparable to Special Economic Zone (SEZ) and yet to break the ground in India.
Figure: III -1
Spectrum of PSP
(0 Corndor Management Contracts
complexities of agreements
players in the road sector

Rlsk for private sector investor, tenure &
Current practice & Suitability to present
(e) Build Operate & Transfer (BOT)
(d) Rehabilitation, Maintenance and

Operation
(c) Operation (tolling) and Maintenance
Contracts
(b) Turnkey Contracts
(a) Maintenance Contracts
(Source: Derivedfrom actually prevailing practices)
In above spectrum, as the option traverses from (a) to (f), the magnitude and extent of
private investments increases and hence the agreements are also found elaborative
however, the present players in road sector (contractor, employing public body,
75
planners, consultants etc.) are yet novice to more involvement of private sector in
the project. Among these (i.e. from (a) to (f», it is the BOT/BOOT which has become
cynosure as a contractual form among spectrum of PSP wherein a private sector is
really investing on long term basis in the road sector like Sovereign and seeking
commercial benefits under a contract. In the undertaken study, BOT/BOOT
agreement (these are widely practiced in India) based PSP is equated as PPP.
3.3 PUBLIC-PRIVATE PARTNERSHIP: A CHANGING DELIVERY

SYSTEM:
Concentrating on PPP mode of delivery system, the PPP is very significant study area
as it involves aspects of traditional turn key projects (for type of products involved
like- complete construction of a road / bridge), it covers aspect of maintenance
contract (because maintenance including rehabilitation during for tenure of agreement
is assigned to private entrepreneur) and it also covers aspect of operations during
maintenance once facility is built and opened to traffic. Hence, PPP mode covers all
variants of PSP over the tenure of a single project.
Among the present spectrum of PSP, the traditional way of delivering in road sector is
referred to turn key projects and maintenance works and to distinguish, the traditional
way of functioning of highway project life cycle in India at state or national level is
depicted in generalized fashion in figure III-2 based on researcher’s actual experience
in this field. This is more referred to in literature as Engineering Procurement
Contract (EPC) or cash contract. Here Government hires contractor (it may be
conveniently stated that contractor is employed by the Government) for construction
of a project in prescribed manner subjected to financial constraints. Of course, the
need is well established and mostly project is approved much after proving its
eligibility owing to financial constraints. The priority in getting approval some times
is driven by influential capacity of local public leaders. However, proposal for
approval narrates significance of project in terms of traffic and linkages. The project
is first approved for financial aspect mentioning head of funds under which
expenditure will be booked. After actual allocation in yearly budget the bid process
starts. Bidding is done among a category (eligibility of categoiy of contractor for
bidding is based on scope of work and estimated cost) of contractors generally
registered with state or central Public Works Department (PWD). The bid documents
76
are typically bulky and are scrutinized at various levels as per cost of work. The bid
documents are full of what are rules to be followed and describe powers of Engineer
in charge (representative of government), accommodating full specifications.
Generally bidders get time of two weeks to four weeks to purchase and fill in the
blanks in bid documents and submit it with earnest money. The work is awarded
within a week based on lowest cost bidding criteria (least cost to State).
Figure: III-2
Traditional Delivery of road works
All drawings and Contractor builds

specifications are himself or gets done
prescribed. through subcontracts
Measurements & tests for material supply,
taken by government labour or composite
job
Lowest cost bidding, Contractor is paid

Handing over site of advances and stage
construction to wise bills if
contractor but site in- Government satisfied,
charge is Government delay & bad quality
Engineer penalised
Government decides
scope ofproject, type
of construction, deposits are released
estimated cost & time. after defect liability
Competitive bidding term
Wait for funds and

fiscal allocation for a
project of new
construction or
maintenance
(Derivedfrom actualpractice)
Any conditional bid is outrightly rejected because it is a dictated procurement process.

The contractor selected is awarded the work and he can start work immediately if he
pays security deposit generally at the rate of 10% of estimated cost of bid. The
contractor can avail mobilizing advance and machinery procurement advance ( both
are interest free) at rate of 10% & 5% respectively of his bid offer if he submits same
77
amount of bank guarantee. This advance is recouped from his due payment in
subsequent bills payable. The execution starts as per instruction of government
engineer’s instruction. The work is measured and recorded by this engineer for
payment and it is paid after site checking of higher officers (state) in prescribed
percentages of work.
The contractor can be paid only and to the extent the site engineer from government
(called Engineer in charge) certifies it. Now, this is the key in hands of Government
representatives. The low cost bidding criteria itself inspires the contractor to save as
much he can. The Engineer in charge satisfies himself for quality in terms of “ok” test
results and quantities as per plan/ tender document before certifying so. The material
testing is done in a government laboratory (now major testing is allowed in certified
private test laboratories but under eye of government). The contractor is paid as per
progress of work and is relived of obligations after paying him final bill. Now a days,
defect liability period is implemented after physical completion of work. During this
period some money/deposits are held by government for use in case of contractor fails
to repair damages. The above contract frame work is more biased in empowering
State officers and hence contractor can be easily dragged to desired end product at
every stage of execution. This mode of delivery system is now getting through a sea
change under PPP. However, in the traditional delivery system, following points are
noteworthy.
• The Government is single handed attempting to achieve efficient use of public

money mainly through inviting competitive bids for lowest price in a
formatted transparent manner. Hence, the contracts are carefully drafted in
length to see that contractors do not underperform or impose extra costs to
the Government. The innovations are possible only if Government itself
initiates & stipulates at bidding stage. After entering bidding stage, contractor
has defined entry & exit point.
• The powers to make payments for assigned work creates duress factor and
hence the cases of misappropriation and wastages are linked with this type of
execution.
• Since the contract is not linked with major punishment to party (Government
or Contractor), time control & cost control (within budgeted limits) are not
78
stringent. There are also cases when paucity of public funds had delayed the
progress of works.
• A major flaw is, the project is undertaken on economic criteria and it has no
oversight mechanism except the executing public body itself .Also, a project
may be selected on the basis of sheer political choice. In all cases, the
contractor has no jurisdiction to comment on need for the project or type of
project.
• The contractor is liable to this product up to very short period as compared to
expected efficient life of the product. A bridge is supposed to last for atleast
30 years without major repairs and it may last for total 50 years or more
whereas the contractor is liable for only first five (generally five years for
some parts only) years of construction. Hence, to avoid the future failures,
Government tends to overbuild for creating permanent structures, technically
to state that factor of safety1 will be very high. This is major point where a
private sector can score high if long term maintenance is vested to the
contractor of originalwork himself.
• Any subsequent recurring expenditure is termed maintenance and due to
delayed periodical maintenance or deficient original work, maintenance of
assets so far created is a major issue in allocating scarce public resources.
• The crowding of highways (or any public assets) is not viewed other than
maintenance or need for capacity expansion perspective in above delivery
system. Hence, efficient use of assets is not purview of traditional delivery
system.
• The traditional functioning of public bodies is assessed in terms of spending
capacity of budgeted outlays which may tend the representative of
Government to actually spend the resources in place of alternative efficient
recourses.
• A contractor may get exposed to international practices in the run of his
business whereas Government decision makers are likely to lag in this aspect.
Hence, the efficiency, economy and innovations are likely to lag in terms of
international practices when Government designs and executes a project.
Under changing delivery system, implicit planning consideration is resolving above

referred shortcomings of traditional approach by assigning almost every thing to
79
private entrepreneur. Hitherto, private sector was cultivated to supply building
materials, large plant- machineries, skilled/unskilled manpower or finished civil
engineering product (a highway lane or bridge) for pre-decided cash payment in
stipulated time frame(generally 1 to 5 years at most). Now it is expected that private
sector will hold the asset created by own money for decided term (called concession
period, generally 15 to 30 years) and will daily collect user charges (better termed as
Toll) by attracting traffic on his built facility to recuperate his investment with returns.
The private party shall bother about all the maintenance (reducing drain on public
exchequer) and service standards (including crowding). The optimum design, cost
control and timely completion of project are linked to viability of toil project and
hence private entity is forced to minimize these problems. Additionally, during whole
project, traffic adequacy (macro economic purview) and strength of financial cash
flow (financial manager purview) are most important parameters for commercial
success of project. This is definitely not a Civil Engineer’s job, a most responsible
entity for development of state and national highways.! The private sector so far is
accustomed to invest upfront and earn upfront being mainly engineering firms. What
an engineering firm will do with stream of revenues (which may be stable or erratic)
with out in-depth financial plan for maximizing returns? Perhaps, they can think of
paying back outstanding debts as per strength of cash flow; that is all.
Notwithstanding this, the public sector is expecting many other things under the label
of allocation of risks. These risks are nothing but financial implications of
events/hindrances affecting timely completion of construction or cost overruns; events
affecting flow of traffic and present value of future cash flow etc. All these aspects are
not really engineering considerations that can be tackled by a typical construction
firm. The idea of private sector participation is in fact asking to look into all such non
engineering (as shall be termed traditionally) aspects which have impact beyond usual
2 to 3 years of construction period.
A conceptual diagram prepared below for this changing paradigm of PSP is narrating
simplicity over lengthy traditional option as far as interface with Government is
concerned. However, it is in fact more complicated owing to inherent host of
uncertainties. Here, the private sector is mostly given free hand to design (some
general arrangement drawing & typical cross sections are given), build, ascertain
quality and maintain the asset for time as decided by competitive bidding for given
80
rate of toll. The role of State is limited to clearing the site from utility hurdles and
acquisition of land while supervision and related proof checking of design is given to
independent private parties with varying role as per case of contract. The asset is
handed over to government free of cost at the end of concession period. Here, the
bidder submits technical and financial proposal and shortest concession period based
bidding is generally followed. Recent concession documents ask to declare at bidding
stage financial support sought by bidder from government (within 40% of bid
amount) or the negative grant bidder proposes to pay to government.
Figure: IH-3
Changing Delivery of road works
Concessionaire submits own Maintain die facilit y& collect

design and if selected builds so toll immediately alter
withown financial support construction. More traffic gives
mainly equity and some more profit. So hurry in
medium term loans ftom tanks. construction to start lolling.
Construction practice is as per Government is not allowed 10
set IS. standards but with out meddle during concession
much checkingfapprovuls (bom period
Feasibility established based on Handover the site on

traffic studies and linkages, completion of concession
willingness to pay survey. period free ofcost and after
Competitive bidding for lowest briefdefect liability period he is
relieved. Records ore also
transferred to government.
Government mostly continues
tolling for up keeping $ new
development
(Derivedfrom actualpractice)
Often the civil cost of project is small subset of total project cost considering
discounted net revenues (or interest charges imputed by bidder over the concession
period). For earning returns on investments, the private sector is left to mercy of
traffic in terms of toll in such projects. Though traffic is perceived as an equation of
economic growth and pattern of spatial development (land use pattern) in the region,
Government is not engaged in resolving this important aspect but often gives binding
to minimize disturbances by allowing “non-compete” conditions in the bid. Over &
above, technology risk (viability of selected design/technology/materials for next 15
to 30 years to withstand forces like overloading, change in vehicle technology,
81
excessive floods or frost etc,), financial risk (interest rate and inflation fluctuations)
etc. is borne by private sector. All these complex factors are simply beyond the
control of traditionally operating construction firms making their role most
vulnerable. The role of State in ensuring quality and quantity is replaced by handing
over long term maintenance at cost of concessionaire and the concessionaire is
allowed to minimize costs under prevailing set of standards without approval of
government. The demand for services (traffic level) is supposed to respond to level of
services offered and thus establishing self control on service standards. Of course, this
statement often goes wrong when users have no other choice than a single toll road
where charges are imposed irrespective of level of services. The minimal role of State
authority and maximum freedom to the concessionaire for better service to users is the
crux of this modality.
3.4 PUBLIC-PRIVATE PARTNERSHIP AND CONCESSION DESIGN:
Sometimes it seems that researchers and planners flexibly use PSP & PPP
interchanging manner. Of course, all the forms of PSP mentioned under above
spectrum (figure III-l) will be implemented under some contractual agreement. But
PPP agreements (BOT/BOOT) are special agreements where other than routine
maintenance, original work (or heavy rehabilitation) is involved like turn key works
but not on cash contract basis. Since it will be an original construction work, it will
require larger sum and hence larger tenure of contract. The PPP term has converged
essence of spectrum of PSP which is legally labeled as Concession Agreement. The
concept of Concession is new to India but is more than century old in Europe. Before
getting into structure of Concession Agreement, it is necessary to understand and
define the literary term- PPP which is contractually transformed in to a concession
agreement.
3.4.1 Definition of PPP:
No legal definition of PPP is so far coined by any country though PPP shall mean a
contract under PSP in roads development. But it is observed that “Public” connotes
Sovereign in all definitions of PPP. In its December 2004 Report to Congress on
Public-Private Partnerships, the US Department of transportation (USDOT 2004)
82
broadly defines a PPP as “a contractual agreement formed between public and private
sector partners, which allows more private sector participation than is traditional.”
The briefing note (Renda & Schrefler 2005) produced by Center for European Policy
Studies for European Parliament agrees that no overarching definition of PPP persists
currently. Hence, PPP is a sort of umbrella covering a broad range of agreements
between public institutions and the private sector aimed at operating public
infrastructures or delivering public services.
The European Commission has published Guidelines for Successful Public - Private
Partnerships (European Commission 2003) wherein it is defined that “A PPP is a
partnership between the public sector and the private sector for the purpose of
delivering a project or a service traditionally provided by the public sector. PPPs
recognize that both parties have certain advantages relative to the other in the
performance of specific tasks. By allowing each sector to do what it does best, public
services and infrastructure can be provided in the most economically efficient
manner.”
KPMG (Hong Kong), an international consultant for PPP Advisory Services writes2
that “Public Private Partnership (PPP)/Public Finance Initiative (PFI) can be defined
as the design, build, finance and operation, by the private sector, of assets and services
that the government has traditionally procured and provided to the community and
which have been funded by taxpayers. In return, the private sector generates revenue
either from the levying of tariffs on users or the receipt of periodic service payments
from the government over the life of the PPP agreement.” The above literature lightly
comments that a public -private partnership is a partnership between the public &
private sectors in which risks and benefits are shared. Of course, the risks are more
left for private sector & benefits are truly shared by public sector.
Oxford University Press writes3 for PPP as-“an agreement between Government and
the private sector regarding the provision of public services or infrastructure.
Purportedly a means of bringing together social priorities with the managerial skills of
the private sector, relieving Government of the burden of large capital expenditure,
and transferring the risk of cost overruns to the private sector. Rather than completely
transferring public assets to the private sector, as with privatization, Government and
83
business work together, to provide services.” The Press specifies that British
Government initiative to involve the private sector in the provision of public services
is more known as Private Finance Initiative (PFI) and is part of the public-private
partnership programme. The British system encourages public authorities to join with
private companies in long-term contracts involving financing, building, and running
infrastructure projects. The model is spreading other countries including European
countries & US under broader name of PPP. The Press observes that it is part of a
wider reform program for the delivery of public services which is driven by the World
Trade Organization, International Monetary Fund & World Bank as a part of their
'deregulation' and privatization drive (Liberalization-Privatization-Globalization
process).
HOCHTIEF (a German PPP solution provider working international) in its

Corporate Communications (HOCHTIEF 2006) elaborates a study by the National
Audit Board in the United Kingdom. The study has revealed that placing public
infrastructure projects in the hands of private enterprise produces efficiency gains
averaging 17 percent. This savings effect is due above all to the lower investment
costs. This is because the private partner takes the entire life cycle of asset into
account when realizing a PPP project. This enables him to optimize costs on an end-
to-end basis - over service life periods of 20 to 30 years. Other known benefits are
shorter planning and construction periods and improved project operation and
maintenance.
Standard & Poor’s definition (Standard & Poor’s 2005) of a PPP is any medium-to-
long-term relationship between the public and private sectors, involving the sharing of
risks and rewards of multi sector skills, expertise, and finance to deliver desired
policy outcomes. PFI is stated as a subset of PPP that typically involves concessions,
or franchises, of public sector assets contracted with the private sector to provide
long-term services.
Cesar Queiroz (2006), the leading Road and Transport Infrastructure Consultant for
World bank defines PPP for World bank research as a partnership between the public
sector and the private sector to deliver a project or a service traditionally provided by
the public sector which allows each sector to do what it does best & risks are borne by
those best able to manage them. This definition is mostly used world wide by policy
84
makers and researchers because it leads to study project specific characteristics while
preparing a PPP agreement.
ADB (2000) explains PPP for two types of countries. In first and most prevailing
case- when the government’s obligation to do something is not matched by the reality
of the public finances, the private funding is the only option & it leans to PPP
contracts. Often it is seen as the easy option, and therefore the obvious course to
follow. As most people seem to think that infrastructure makes money the PPP is
supported. In second but mature case, PSP or PPP is seen as the better way, leading to
sector efficiency, and funding its natural consequence - but not necessarily its
principal objective. ADB observes, today most countries fall into the first category. In
Europe, the United Kingdom (UK) has come out of this thinking, and in Asia, Hong
Kong, China are the examples. Worldwide, the development banks are leading the
argument and assisting client developing countries in the transition to the second
category recognizing true rationale for Private Sector Participation. ADB notes that
PPP is more seen as a BOX technique for highway projects in Asia.
Government of India states PPP as an active involvement of private sector keeping in

view galloping resource requirements and concern for managerial efficiency exposed
to consumer responsiveness.(Economic Survey: 2006-2007) Frankly, it means nothing
more than larger role for private sector and no combined effort (partnership) in
achieving common goal is in vision. No business fashioned approach is envisaged for
private partner in any policy documents of State or Union Government of India. The
Indian PPP is synonymous with Build-Operate-Transfer (either toll based or annuity
based) type of agreements as emerges from Economic Survey or official web site of
NHAI or Ministry of Shipping Road Transport & Highways under Government of
India.
Summing up, the definition can be accepted for undertaken study as - “PPP is a
contractual binding between representative of Public interest and representative
of capable private interest who together produce assets/services for public
purpose essentially financed by private interests but to safe guard private
interests with due cost to public.” As noted above, here, the agreement is the
governing key to achieve benefits of PPP for both the parties. Hence the agreement
which is mostly referred as concession agreement shall address both- the public
85
interest and private interest. The concession agreement holds prime importance
notwithstanding any loud claims made by sovereign in its invitation for private sector
participation. Of course, as made clear in above discussions, character of PPP
agreement shall vary project specific and hence role of both parties shall vary as per
requirement of each project. This will also depend upon type of risks public sector
wants to transfer on private sector & who does best basis.
Essentially all these quotations imply PPP is a changing delivery system as discussed
in earlier sections. Now the private sector is not hired or employed rather made
partner of the project to achieve those goals which were not achieved by Government
single handed. Since, the private partner has single agenda of maximizing profit, the
project has to be designed in financial format specifying expenses and income from
project. It requires many changes in contract document of traditional delivery system
when a contract (i.e. a concession agreement) is designed and offered for bidding
under PPP.
3.4.2 Concept of Concession for Road Sector- A Deliberate Monopoly:
The concept of concession was in use in Europe for infrastructure since more than two
centuries. In 1777, for example, the French government gave the Perrier brothers a
15-year concession to collect and distribute water to households in parts of Paris.
They took the water from the Seine using pumps, transported it through pipes of wood
and steel, and then delivered it in barrels. In few years they ran into financial trouble
and their firm was nationalized (Benzancon 1995 quoted by Kerf et al. 1998). Hence,
the concept has roots in Europe and many countries in Europe have exhibited range of
innovations under PPP.
It is really interesting to note that concessions are deliberately allowed monopolies in

the sectors where public goods are the subject matter with generic monopoly value.
Like, one can not allow many expressways to be built between Vadodara-
Ahmedabad to create competition for lowering the prices. Hence, the competition
within the field of transportation between two points can not be allowed similar to
consumer goods owing to huge sunk costs and scarce resources of land. Similarly,
transporters can not be allowed to construct own individual routes for carrying out
businesses. Hence, it is the competition for the field of transportation between say
86
Vadodara- Ahmedabad that is to be ascertained and once it is awarded, it will carry
significant market power for long term to attract the consumers of this service.
Though the commercial value of a road is well exploited by transporters, no example
is yet found in the records that any transportation company or consortium has offered
bid for construction of any route. Hence, the Government has to either provide the
road directly from public funds or through PPP route for such interest groups atleast
on the principles of welfare economics. When a Government is opting for PPP route,
it is basically a construction firm (rarely specialist financial institution like
Infrastructure Leasing & Financial services, IL&FS) that bids for the project who has
business principle to earn assumed return on investments and it has no other utility of
the project. Hence, the agreement between Government and bidder (i.e. concession
agreement) shall be explicit about expenses and revenues not only for construction
period but for 15 to 30 years of toll period. Again, though Government is opting PPP
route mainly to invite private funds from bidder of the project, the bidder seldom
invests own funds fully. The bidder resorts to leverage on his funds and arranges
debts from formal institutions like banks etc. and hence the concession agreement
shall be bankable with adequate recourse to lenders. Since the concession is offered
by Sovereign, the lenders see implicit guarantees if concession agreements are not
overt about lender’s recourse. The concession is framed based on revenues from users
of facility (except annuity type of projects where concessionaire is not allowed to
charge users himself) and users are not at the discretion of Sovereign (i.e. users can
not be dragged to facility by the Sovereign) which complicates the design of
concession. The prevailing practice leaves this aspect of uncertainty of traffic
unanswered under the bracket of risks allocation as a part of concession agreement
though Government and bidder both satisfy themselves for adequacy of traffic at
bidding, stage through feasibility studies.
3.4.3 Concession Agreement: Structure and Design Issues
Unlike PPP, definition of Concession is not discussed by various interest groups with
an understanding that it is only right to collect tolls on a public asset by an
entrepreneur for making available that facility. Kerf et al. (1998) reiterate the same
conceptual understanding as -“a firm obtains from the government the right to
provide a particular service under conditions of significant market power.” A
87
concession is thus a legal device that can be used to create competition for a market,
when competition in the market is not operating. According to this definition,
concessions need not involve the private sector, since governments can award
concessions to public enterprises also. If the finance is to be procured from leveraged
debt sources, in fact Government could be the best candidate to avail loans from any
market at lower cost. This is more appealing when concessions are awarded on public
roads. Going back to the rhetoric argument of efficiency of private sector then drives
the public body to keep itself away from any project where performance is inevitable.
Practically in India, all PPP projects are awarded to private parties4'
Regarding objectives of concession, the WB Technical Paper No. 399-1998 produced

by Kerf et al. quotes the famous nineteenth century economist Alfred Marshall for
concessions as follows:
“A public authority may be able-to own the franchise and, in some cases, part of the
fixed capital of a semipublic undertaking, and to lease them for a limited number of
years to a Corporation who shall be bound to perform services, or deliver goods, at a
certain price and subject to certain other regulations ... the special point of the
proposal is that, where possible, the competition for the franchise shall turn on the
price or the quality, or both, of the services or the goods, rather than on the
annual sum paid for the lease.” Hence, the focus of concession shall be either
pricing (in the public interest) or service standards. Kerf et al. touch this issue under
article 3.8: Duration, termination and compensation (World Bank Technical Paper
No. 399-1998 page 79-84). The argument is put for rebidding of agreement to
introduce competition (especially for projects started with unsolicited proposals) but it
is more in terms of terminating the agreement with compensation and deciding term
of concession as compared to efficient lifespan of asset created. Though such
mechanism is not yet in practice but user’s perspective emphasized by Marshall can
be a good design aspect of concession if the agreement is written considering
financial aspects of the project in detail which is not in scope of above WB report.
The guidelines discussed by Kerf et al. are for infrastructure but world over, the
concession agreements for roads have been influenced by these guidelines till today.
The WB guidelines on concession are more of legalization of economic principles but
they are very silent on financial performance of the concession. Hence, the concession
88
agreements of that period also did not touch financial aspects keeping them under
prerogative of concessionaire.
Historically, the whole genesis of concession is based on economists’ suggestion that

competition be used for choosing the single supplier of a natural monopoly market,
before granting the monopoly for a fixed term. The suggestion, originally made by
Chadwick (1859) and developed by Demsetz (1968), was to organize bids by which
firms, competing for the right to serve a monopoly market, would compete away all
monopoly profits, thus eliminating the need for ex-post regulation. In the words of
Chadwick, who originally proposed the idea in 1859, competition for the field shall
substitute for competition in the field. However, the whole doctrine is well known as
Demsetz’s auction. The road sector is using competition for the field while awarding
concession but then after user’s interests are not observed what Marshall expected.
The Demsetz’s auctioning may suggest exposing the natural monopoly again to
market forces by inviting competition under such conditions. This is the same what
Kerf et al. have suggested in World Bank Technical Paper No. 399-1998.
Structurally, a concession can be expected to have elements of a turn key project for
original or new construction, maintenance, traffic regulation at tolling point (toll
plaza) because physically these activities are involved in a full fledged BOT (or BTO,
DBFO) project. But concession agreement is typically complex document as
compared to traditional cash contract since investments are to be recouped with out
harming public interest and investor’s commercial interest. Since it is basically a
contract between two parties, it starts with offer to award concession, instruction to
bidders, award criteria, agreement to build-operate -transfer, a general construction
requirement, list of applicable standards, construction manual, maintenance manual,
transfer stage requirements and most importantly, renegotiation/termination related
covenants for keeping the investor good under untoward circumstances (or punishing
if he has underperformed) etc. A conceptual picture of typical concession agreement
(CA) for roads based on actual practices in the field is depicted under Figure: III-4.
The aspects of Government decision to go for PPP route and contents of CA are very
briefly pointed out in this Figure.
89
Figure: III-4
Conceptual Structure of Concession for Roads
Government policy decision for- Decisions related to bidders- '

exclusivity & its tenure, decision Project specific bidding
for rate of return assurance, requirements (civil design,
direct/shadow tolling and pricing construction and financial
rules, % financial sharing, enabling milestone aspects), bidder’
legal environment, guarantees, experience and financial
preference for competitive or capacity to invest on long
unsolicited bidding, decision for terms, type of firm allowed
regulators and independent
engineer/auditors
J
Contents of Typical Concession Agreement
1. Construction, performance manual, drawings, stipulated

construction period and toll period, penalties/bonus on milestones,
2. Government support for traffic & parallel road development
3. Pricing schedule and future price adjustments, rebates (monthly
passes) /exemptions to pricing, clarity for assurance of returns on
investments
4. Step-in rights for Govemment/lenders in case of underperformance
of concessionaire
5. Various risks (political, financial, project formulation, legal etc.)
Force Majeure and allocation to either parties, Insurance,
compensation methods/formulae
6. Termination/renegotiation of contract to adjust to changed
working conditions
7. Oversight board, review board, dispute resolution mechanism
Regulatory mechanism for performance and tolling
(Source: As per actual practice)
90
Practically, ascertaining willingness to pay and (politically) willingness to charge the
users by direct tolling or by increasing indirect taxes is a major decision making under
PPP route. Economists may prescribe marginal pricing for a toll road; it may not help
the investor to recover the costs within given toll period if traffic does not ply in
adequate volume on selected road. A tolled road faces public resistance on first day of
tolling and then at every revision of toll rates since the benefits envisaged by the
planners are not realized by the users (atleast by local users) under complex multiple
tax regimes. The investors are keen to recover the financial stake at fastest and they
may prefer shorter toll period, the price capping followed by public bodies may tend
to lengthen the toll period which exposes the concessionaire to more variants of
problems. Since Governments world over are opting for PPP merely to alleviate
pressure on public exchequer, there is full chance that once the paucity of funds is
overcome, toll resistance may lead to discourage tolling of roads. There is no bench
mark yet established in India (and many such countries) to decide actual gains from
PPP route vis-a-vis traditional cash contracting. Under such circumstances, PPP route
is seldom to sustain over long term of CA. Any CA is inherently a risk and reward
mechanism and the concessionaire passes through wide range of risk factors that
decides fate of concessionaire if not properly attended under CA. The classification of
risk is well elaborated by Kerf et al. (1998) which are quite elaborative but allocation
of risk is generally decided by individual Government may be project specific and
hence often differ from WB guidelines. Following Table: III-l is summary of risk
identified by WB for an infrastructure project with allocations in their view.
91
Table: HI-1
Identification and Allocation of Risk in Designing Concessions as Recommended
by World Bank
What is the risk? How does it arise? How should it be allocated?
Design / development Design fault in tender Public sector to bear risk if design is
risk Design defect specifications provided by public sector.
Contractor design fault Liquidated damages to be paid by
constructor; once liquidated damages
are exhausted, erosion of project
company's returns
Construction risk Within construction Contractor to bear risk through fixed-
Cost overrun consortium's control price construction contract
(inefficient construction plus liquidated damages; once
practices, wastages, and so on) liquidated damages are
exhausted, erosion of project
company's returns
Outside construction Insurer risk if insurance is available;
consortium's control: once insurance proceeds
a) changes in the overall legal are exhausted, erosion of project
framework company's returns
(changes of laws, increased
taxes, and so on)
Outside construction Public sector to bear risk
consortium's control:
b) actions of government that
specifically affect the project
(delays in obtaining approvals
or permits, and so on)
Delay in completion Within construction Liquidated damages to be paid by
consortium's control constructor; once liquidated
(lack of coordination of damages are exhausted, erosion of
subcontractors, and so on) project company's returns
Outside construction Insurer risk, if risk was insured; once
consortium's control insurance proceeds are
(Force Majeure, and so on) exhausted, erosion of project
company's returns
Failure of project to Quality shortfall, defects in Liquidated damages to be paid by
meet performance construction, and so on constructor; once liquidated
criteria at completion damages are exhausted, erosion of
project company's returns
Operating cost risk Change in practice of operator Project company to bear risk
Operating cost at project company's request
overruns Operator failure Liquidated damages to be paid by
operator to the project company; once
liquidated damages are exhausted,
erosion of
project company's returns
Failure or delay in Public sector discretion Public authorities to bear risk

obtaining
permissions,
consents, and
approvals
92
What is the risk? How does it arise? How should it be allocated?
Changes in prices of Increased prices Allocation of risk to the party best
supplies able to control, manage,
or bear it (supplier, project company,
or users)
Non-delivery of Public sector failure Public authorities to bear risk
supplies on
the part of public
authorities
Revenue risk In accordance with the terms Project company to bear risk
Changes in tariffs of the contract (for example,
indexation of tariffs leads to
reduced demand)
Government breach of the Public sector to bear risk
terms of the contract
Changes in demand Decreased demand Project company to bear risk
Shortfall in quantity, Operator's fault Liquidated damages to be paid by the
or shortfall in quality operator; once liquidated
leading to reduced damages are exhausted, erosion of
demand project company's returns
Project company's fault Liquidated damages to be paid by the
project company to public authority
Financial risk Devaluation of local currency; Project company to bear risk (hedging
Exchange rates; fluctuations facilities might be put in place)
interest No convertibility or no Public sector to bear risk; in case of
rates Foreign transferability contract termination,
exchange compensation to be paid by
government
Force Majeure risk Floods, earthquakes, riots, Insurer risk, if risk was insured;
Acts of God strikes, and so on otherwise, risk to be borne by
project company
Changes in law Changes in general legal Normally, project company to bear
framework risk (public sector could bear risk
(taxes, environmental when changes are fundamental
standards, and so on) and completely unforeseeable; for
example, switch from free
market to central planning)
Changes in legal or Public sector to bear risk
contractual framework directly
and specifically affecting the
project company
Performance risk Breach or cancellation of Insurer's risk, if risk was insured;
Political force contract; expropriation, otherwise risk to be borne by
majeure creeping expropriation, failure public sector; in case of contract
to obtain or renew approvals termination, compensation
to be paid by government
Environmental risk Operator’s Fault Liquidated damages to be paid by the
Environmental operator; once liquidated damages are
incidents exhausted, erosion of project
company's returns
Pre-existing environmental Public sector to bear risk
liability
Source: Kerfel al. (1998)
93
The above framework of CA (associated with risk matrix) is very basic and has seen
varying modifications as per country specific experiences. Before narrowing to Indian
perspective, international experience of concessions and other innovations of PSP are
explored as below.
3.4.4 PPP Development across the Continents:
The world over, nations are implementing PSP programmes but the basic tenets are-
failure of State administered road sector to cope up rapidly growing transport needs
and financial crunch, political will to create assets urgently and to charge the users
and finally in turn boost the economy by investing at unprecedented scale by inviting
PSP supported by public funds.
International Public Works Financing Projects (PWF2004) has produced comparable

database of PSP road projects world wide taken up at regional scale (programme
level) for period 1985-2004.
94
Table: HI-2
Regional Road Projects Planned or Completed since 1985 by Contract Type*
(1985-2004)
Region Contract Number Percent us$ Percent %of
Type Billion PPPby
cost
Africa & Concession 1 8% $0.0 1% 65%
Middle BOT/BTO 5 42% $1.5 31%
East DBFO 3 25% $1.6 33%
Other PSP 3 25% $1.7 35%
Subtotal 12 100% $4.8 100%
Asia & Far East Concession 49 40% $21.8 26% 80%
BOT/BTO 61 50% $34.9 42%
DBFO 5 4% $9.8 12%
Other PSP 7 6% $16 20%
Subtotal 122 100% $82.5 100%
Europe Concession 69 34% $61.7 45% 81%
BOT/BTO 53 26% $31.4 23%
DBFO 45 22% $18.3 13%
Other PSP 34 18% $27 19%
Subtotal 201 100% $138.4 100%
Latin America Concession 45 44% $11.6 44% 96%
& Caribbean BOT/BTO 50 49% $12.4 47%
DBFO 3 3% $0.7 3%
Other PSP 5 4% $1.7 6%
Subtotal 103 100% $26.4 100%
North America Concession 81 50% $29.1 41% 49%
BOT/BTO 14 9% $4.3 6%
DBFO 5 3% $1.1 2%
Other PSP 61 38% $35.7 51%
Subtotal 161 100% $70.2 100%
Worldwide Concession 245 41% $124.2 39% 75%
BOT/BTO 183 31% $84.4 26%
DBFO 61 10% $31.5 10%
Other PSP 110 18% $82.3 25%
Total 599 100% $322.4 100%
* Omits projects included in PWF database that lack sufficient information to determine cost
and are insignificant
(Source: Summarizedfrom International Public Works Financing Projects (PWF2004))
A category of BTO (Build-Transfer-Operate) is found existing in database given

under Table: III-2 which means asset is handed over after construction (before tolling)
95
but tolling rights are given to concessionaire. Under BTO, State will have right to
manage asset like it is a public asset. Similarly, Design -Build-Finance-Operate
(DBFO) category is found in this database which is variant of BOT with a difference
that here design is kept under purview of bidder for such projects. This modification
helps to avoid claims based on design adequacy/suitability issues. The essence of the
summarized data under Table: III-2 is, PPP projects are world over dominating since
last two decades. In this data, PPP projects are projects involving long term financial
partnership from private party which are total of projects under - Concessions (here
PWF takes it as a long term lease, may be on existing asset); DBFO and; BOT/BTO
type of projects. Region wise, Latin American countries are found patron of long term
private financing of road projects followed by Europe and Asia as per this statistics.
The BOT/BTO format of contract is most favoured mode by Latin American
countries and Asia. As per this database, Europe is not favouring handing over of
construction to private sector like BOT/DBFO/BTO contracts but allows concession
for tolling operations to private and public body as well. The Europe however applies
many innovative practices of contracting as explained below.
3.5 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES-

EUROPEAN INNOVATIONS IN CONTRACTING PRACTICES
UNTAPPED IN INDIA:
The European countries have maintained network of superior roads from 1998 to
2004 mainly through concessions but the concessionaires could be private and public
companies as well. The data presented under Table: III-3 gives country wise picture
of PSP in Europe as on 1-1-98 and as on 1-1-2004 with percentages of concessions in
total road network. As evident from Table: III-3, total network of this leading
countries grew from 48938 km to 54299 km in 6 years @ 2% per year but the
concessions grew @ 4.5% per year. This shows tendency of handing over more
stretches under concessions by this countries. Whole Europe has maintained
important roads through public administration except few by private concessionaires.
The share of private km was @ 9% of total network as on 1-1-98 which got doubled
of now total network as on 1-1-04 where as public company run concession km got
reduced over this time. The share of public concessions in total concession reduced
from 73% to 51% in this period while share of private concession km almost double
96
in this period. This could be result of leasing out public concessions and these are all
indicators of growing preference for PPP.
Table: 01-3
Europe Road Network & Concession of Roads* (selected countries)
Europe As on Motorway Motorway Concessionaire Companies
1-1-1998 Network Network
Europe as on Under Public(Km) Private(Km) No. of No. of
1-1-2004 Concession Public Private
Germany 11200 0 0 0 0 0
12000 4 0 4 0 1
UK 3300 580 0 580 0 3
3476 580 0 580 0 3
Austria 2000 180 180 0 1 0
2000 2000 2000 0 3 0
Belgium 1800 6 6 0 1 0
1729 5 5 0 1 0
Spain 8200 2255 405 1850 3 14
10500 2619 118 2501 1 28
France 8923 6705 5905 800 8 1
10383 7840 6940 900 10 4
Italy 6500 5600 5420 180 26 1
6840 5659 1261 4398 7 17
Netherlands 2300 4 0 4 0 2
2300 4 0 4 0 2
Portugal 1422 990 0 990 0 2
2271 1771 0 1771 0 11
Sweden 1437 0 0 0 0 0
1450 16 0 16 0 1
Switzerland 1856 0 0 0 0 0
1350 93 93 0 1 0
TOTAL 48938 16320 11916 4404 40 23
(100%) (73%) (27%)
54299 20591 10417 10174 23 67
(100%) (51%) (49%)
Note:
For every country, first row is for status as on 1-1-1998 & second row (BOLD letters)
is for status as on 1 -1 -2004
* Omits projects included in PWF database that lack sufficient information to
determine cost
(Source: Compiledfrom Bousquet & Fayard (2001) & Fayard (2004))
The favour for private concessionaire at the cost of public concessionaire is evident
for Spain and Italy. But continued inclination for public administration is visible for
France and Austria. These European countries have central government body for
97
development and maintenance of main network. A central government body
administrates National Highways in England (Highways Agency), Scotland
(Department of Enterprise, Transport, and Lifelong Learning), Netherlands (Ministry
of Transport, Public Works, and Water Management) & Finland (Finnish Road
Administration). This is like FHWA & Department of Transportation for US. India
has Ministry of Shipping, Road Transport & Highways(MOSRT&H) & autonomous
set up of NHAI (created from MOSRT&H) to administer national highways. How
ever, it is to be noted that US & India both largely depend upon State governments
(like Germany) for construction management of national highways and not really
awarded concessions so far on larger scale.
The European countries have not favoured for BOT/BTO or DBFO type of PPP
contracts for development of superior road network as seen above. But soft forms of.
PSP are practiced and concessions are awarded after managing constructions through
public administration. To harness efficiency of private sector under PSP, the
European countries have exercised many innovations beyond typical lowest cost
bidding approach for turn key and PSP projects which involve elements of best value
procurement (i,e. emphasizing other aspects like service standards over price of bid),
early contractor involvement, confidential discussion for value based procurement etc.
The below discussed innovations are based on a US scan team observations for
European practices for contract administration (Cox et al. 2002) and the innovations
pointed out are almost untapped in Indian case and hence are described in subsection
3.5.1. to 3.5.5, The innovations discussed under subsection 3.5.6 to 3.5.9 are based on
another US Scan team observations for construction management practices in Canada
and Europe (DeWitt et al. 2005).
3.5.1 Best Value Procurement:
In Europe, like India (and US) the price based low bid method does exist but is
limited to some simple projects. The EU directives recommend “most economically
advantageous tender” which is in fact best value offer selection & it is used in varying
nature.
Portugal looks in to schedule and quality of technical proposal, but qualifications of

proposers are reviewed on a pass-fail basis.
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In Netherlands for most construction projects, combinations of contractors
(consortiums) compete for the contract. Depending on risks for the government, they
prefer shortlisting of contractors establishing the contractor’s capability of performing
the contract, competence, resources (experienced staff, special equipment, process
certificates, etc.), experience and achievements, work quality in previous projects,
approach to project and execution plan plus price. The Swedes are like Netherlands.
They typically employ a 70 percent price weighting with 30 percent weighting of past
experiences, schedule, QA system, traffic safety, environmental issues, etc.
For best value, single contract for design & construction are also prescribed. State
loses powers for design approval and construction administration in such case.
Design-build contracts are typically awarded with less than 30 percent complete
designs. The countries with expertise in design administration has taken the role of
“reviewing” design rather than “approving” design after award of the design-build
contract.
In design-build projects of UK, the initial contracts were awarded based on 20 percent
quality, 80 percent price basis. Changing over a time, weighting of 60 percent quality
and 40 percent price is more standard, and sometimes quality is given an even higher
weight. For example in some long-term maintenance contracts in UK, a weighting of
90 percent has been placed on factors other than price.
The French have a best-value system resembling the low-bid system. Though price is
not the top criterion, the French Ministry of Transportation states that the lowest
bidder is selected in 95 percent of the cases. Some prequalification of proposed work
is done annually to screen the bidders.
The United States has begun to employ best-value selection, but primarily in design-
build contracts. FHWA’s draft design-build rules consider that no less than 50 percent
of the selection is based on price & price is most often the highest weighted factor.
The shortlisting of contractors is like two cover bidding system of procurement in

India. India also uses one form (offer cover) for evaluating contractor’s capacity &
only after passing through this test, the second cover offering price is considered for
evaluations. India calls both covers at a time in most of the works but does not give
weightage to first cover as it is only for qualifying purpose for getting in to low price
bidding.
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3.5.2 Performance Contracting:
Performance contracting is in its infancy in the US but is well established in Europe.

Performance contracting involves some performance specifications that must be met,
by employing whatever means the contractor determines most economical. These
performance specifications are then continuously measured against a set of
performance indicators as a basis for payment. The performance contracting can be
summarized into the categories of performance specifications, performance indicators,
warranties, and Quality Assurance /Quality Control (QA/QC). Performance contracts
are envisaged to allow much more room for innovation through creative construction
methods— lowering the overall price of a given project. The performance contracts in
Europe are applied for term maintenance, design-build, DBFO, and concession
contracts.
The Netherlands and the United Kingdom are opting for performance contracts for
term maintenance contracts, but France and Portugal employ concessions for long
term maintenance agreements. Earlier United Kingdom started with 3-year
maintenance contracts for a limited scope of work. Currently, the term is 5+1+1 (5
years as a base plus two 1-year options) if the contractor is achieving the performance
indicators successfully. In UK generally performance contracting for term
maintenance is done through Managing Agent Contractor (MAC) under secondary
auditing of Performance Review Improvement and Delivery (PRIDe). The first
auditing is managed by MAC. The British have created a definitive set of
performance indicators for measuring the performance of maintenance contractors.
They have created a Performance Review Improvement and Delivery (PRIDe) group
to audit and ensure the integrity of the system. The managing agent is responsible for
carrying out all design work, asset inspections, network maintenance management,
and supervision of the term maintenance contractors. The term maintenance
contractors are responsible for all routine, cyclical, and winter maintenance; and small
capital maintenance and improvement works.
Dutch have developed a method of performance specification using five levels of

specifications, which are- road-user Wishes; Performance Requirements; Construction
Behavior; Materials Behavior & Requirements for Basic Materials and Processing.
They use various levels as per case of contracting. These levels are linked with
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performance indicators like key performance indicators and target setting indicatorsT •
are developed. The aspect of warranties is now taken care by assigning maintenance
to same contractors. Regarding Quality Control, it is here in hands of contractor and
State can be doing minimal Quality Assurance. In Netherlands, a unique process for
quality audits in lieu of stringent owner inspection is done through a system of penalty
points. Just like referee in a soccer match, the State gives the contractor yellow or red
cards for quality violations. One yellow card is a warning; two yellow cards, or one
red card, mean that the contractor must stop work until the violation is remedied.
The performance outcome based contracting is far away for Indian highways.
However, since last five years, a performance indicator called surface roughness is
being checked before & after treating the road surface. In such case all traditional
QAJQC is also carried out by public bodies.
3.5.3 Scope for Confidential Discussions:
Alternative Designs and Alternative Bids are privately discussed with bidders and
atmosphere for bidders is very conducive to encourage them with confidence in public
bodies for not losing comparative commercial interests in this process. The out come
is, the contractors are both innovative and cost-conscious. The negotiation process
enables contractors to negotiate before award of work from innovations they propose
without concern that their ideas will be shared with competitors. This will however
require longer bid review time.
3.5.4 Europe Financing Highways:
Unlike India and US no dedicated funds for highway financing exists in Europe, taxes
on fuels etc. revenues from highways go to general revenue of states and as per
political priority some funds are allocated for highways. More over, tax exempted
bond financing is not possible in Europe and hence competitive private financing is
possible for highways as compared to public financing. The basic funding mechanism
in Europe is similar to the traditional US pay-as you-go system. Major national
investment in surface transportation infrastructure is funded through the annual
budget allocation process, like United States. For example, in the United Kingdom
money is budgeted on a 3-year cycle and is appropriated annually. The United
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Kingdom also was found the only country visited that has a tax dedicated to highways
as per an act of2000. But it is unlikely to be trend for UK because, use of concessions
or PPPs using bank financing are now peaking up. The European Investment Bank
has special focus on Public-Private Partnerships and provides loans for it to all
member countries. The EIB are seen more serious in financing infrastructure projects
than parallel US state infrastructure banks. Europe highways use bonds & bank loans
as an alternative mode of financing.
Sweden has been found practicing much different approach to alternative finance and
contract management. The Swedish Government places (sells) its general debt
(including debt used for transportation projects) in Japan. Sweden benefits from very
low long-term interest rates currently being paid in Japan (less than 1 percent) and
protects itself against currency risk with an appropriate hedging strategy. Sweden also
facilitates local governments to accelerate approved transportation projects by
arranging their own financing, and simply credits the localities’ investment, without
calculating interest, in the year that the project would have been completed without
local government financing. This practice effectively allows local governments to
make an interest-free loan to the central government if they wish to accelerate their
projects.
3.5.5 Payment Mechanisms In Case Of Concessions:
Generalizing for Europe, shadow tolling, direct tolling and Active Management
Payment Mechanism (AMPM) are practices of payment mechanisms for maintaining
the networks under concessions. Regarding Shadow tolls in UK, payment is made for
the provision of the road service. The Highway Agency pays an amount, which is
based on the number and type of vehicles using the road, with adjustments made for
lane closure and safety performance. The shadow tolls increase over time in
accordance with an indexation formula. Shadow toll payment is based on the
following three criteria: Usage/Demand, Extent of availability of services &
Performance in terms of safety performance payments and lane closure charges.
In shadow tolling, different payments are considered payable for traffic within
different traffic bands and dependent on the length of vehicle (long or short). Bidders
bid for the parameters of traffic levels for a maximum of four, and a minimum of two
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bands, with the provision that for the top band—anything exceeding say X vehicle
kilometers per annum must have toll levels set at zero to ensure that the maximum
liability of the Highway Agency under the DBFO contract is capped. Within each
traffic band the bidders specify a toll for long vehicles (over 5.2m which includes
heavy vehicles) and short vehicles (less than 5.2m). Bidders quote the bands and tolls
from their own assessment of traffic levels. Most bidders found opted for four bands
while for lowest band tolls within that band set at a level that would cover debt
service requirements (but would not provide a return on equity).
If concession involves construction under DBFO contract and project is opened to

traffic before actual completion, toll rates are kept at fraction (about 80%) and reaches
full on issue of completion certificate. In most cases the toll payments step down
again at the time when it is anticipated that the third party debt will have been frilly
repaid. Because revenue in excess of operating and maintenance costs at that stage is
solely return on equity. The payment to DBFO company also gets affected by
performance standards like safety results & lane closures.
In UK, present shadow tolling does not differentiate for service standards of roads,
hence an innovative Active Management Payment Mechanism (AMPM) is introduced
by UK. The AMPM consists of three main parts: congestion management, safety
management, and service management. From bidding data of DBFO contractor,
estimated per km lane per hour traffic is verified with flow of actual traffic for
payment under this mechanism. The details of stipulations are:
S At all levels of traffic full payment will be made if speeds are above 90 Kmph.
•f Full payment will be made if traffic exceeds the deemed capacity of the road
section, even if the speed falls below 90 Kmph.
•S There will be graduation of the level of deduction for both speeds between 60
and 90 Kmph and between 80 and 100% of capacity.
S A bonus will be paid if flow exceeds 110% and speeds exceed 60 Kmph.
S The maximum bonus that can be earned is 20% of the payment for the hour
and road section, if flow exceeds 120% of capacity and speed exceeds 90
Kmph.
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India has shadow tolls in existence & under execution inNHDP but sophistication of
AMPM is not achieved.
3.5.6 Outsourcing Based Government Agencies:
The construction management practices followed in India and like countries impose a
host of responsibility on government body for qualitative and quantitative checks on
the contractor. This is a reason why a typical State body needs full fledged staff for a
highway project. Under PSP there is an attempt to trust the contractor and facilitate
him in relieving from undue compliance of many prevailing construction practices.
The construction management practices in Canada & Europe are worth exploring to
see the acceptance of consultants as an extension of Sovereign representation in PSP
process. The extent of outsourcing of Government highway agency is presented below
which is in fact extent of duress removed from contract administration imparting
equitable playing field to the takers of PSP. When a consultant is assigned job of
measuring the work done, it is real indicator of trusting consultants for the outcome.
Here, Germany and United States are not found divesting their employees of this
capacity.
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Table: III-4A
Shrinkage in Role of Highway Agency in Europe, US and Canada
Contract Use Of Measuring Approval of Contractor
Administration Consultants Work& government for allowed to
Replacing Reporting Subcontracting develop
Government Progress & extent of own quality
Employees as divested of subcontracting plan (ISO is
a contract government allowed base for S
administrator employees marked
countries.)
Canada ✓ •/ (60%)
X ✓
Germany X X ✓
(30%) X
England ✓ •/ X (100%) ✓
Scotland s X (100%)
Netherlands »■ ►► X (100%) ✓
Finland ►► ►► X (100%)
US X X ✓ (100%) X
Note: X = NO (or Rare) ✓ = YES (or Major) ►► = UNDER TRANSITION
* = All countries including US allow the contractor to perform quality tests but
some counties prescribe state quality plan.
(From observations of US Scan team led by DeWitt et al. in 2005)
Table: HI-4B
Shrinkage in Role of Highway Agency in Europe and Canada
Outsourcing Ontario Germany England Scotland Netherlands Finland
Activity
Design 80-90% 30-100% 100% 100% 70% 100%
Testing 100% 50% 100% 100% 100% 100%
Construction 100% 100% 100% 100% 100% 100%
Construction
Contract
Administration 95% 0% 90% 100% 50% 0%
Maintenance 100% 0% 100% 100% 100% 100%
(From observations of US Scan team led by DeWitt et al. 2005).
The Table: III-4B is summarizing level of consultancy involvement in the traditional

role of highway agency. The case of England seems to be most eye-catching knowing
the fact that UK has total main highway network of 3476 km and it is almost totally
managed by UK Highway Agency (Table-III-3). UK has merely 5S0 km under PPP
concessions and it has low tendency to accept private toll road based network. But
UK has divested contract administration to the private consultants. In contrast,
Germany most closely resembles the United States in that it manages its highway
105
networks through government employees. The network of 12000 km of important
highways in Germany is managed by Government bodies and concessions are avoided
as a policy matter. Unlike UK, Germany is not allowing consultants to enter contract
administration.
Europe seems believing that honest outcome is also hindered by public employees.
The idea is if you can trust few quality oriented contractors for execution then why do
not some more contractors for the role of highway agency? The construction is any
way executed through private contractor then why not other activities too. If some
care is taken in contract design for achieving expected performance it results in to
saving a lot on government & contractor’s overheads & time in execution of projects.
Only fear is, will this concept work when Government has many such contracts to
offer and few such honest operators? Experience of one or two failures of such
services will attract government gradual involvement what has been established
traditionally so for. In India, tight checks are advocated time to time on the contractors
acknowledging contractor’s tendency to maximize profits at any cost. Under this
environment, Indian administration does not believe that freedom given to contractors
(except for high skilled jobs done by established contractors) will produce honest
outcome. But recently taken up ADB and WB funded projects on State and National
Highways in India are imposing restrictions on Government involvements in such
projects. Hence, consultants are allowed to record measurements of work and certify
the payments in India for such projects that limit the role of State to make available
utility/hurdles free land for construction.
3.5.7 Concept of Early Contractor Involvement (ECI) in UK:
Under Early Contractor Involvement (ECI) award, the successful contractor prepares
a preliminary cost estimate. This gives an early indication of potential problems in the
scheme and its estimates. The Highway Agency (HA) of UK is already having
probable cost estimates from own quantity survey data bank but uses contractor’s
figure as the base for its key performance indicator (KPI) monitoring of Cost
Predictability. Estimates at this stage are mainly on outline design basis only. At this
stage, options of value engineering are often tried so as to reduce contract budgets.
Contractors then prepare an Initial Target Cost at the Draft Orders stage. This cost has
no contractual significance but it is expected that this Initial Target Cost is
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subsequently affected only by any revision in scope owing to the Public demands and
by delays arising from the time taken for approvals. The Final Target Cost is then
mutually agreed after Public Inquiry/demands. Now this is the Target cost from which
the pain/gain incentivisation operates under the ECI contract. The detailed design
takes place after the agreement of the Final Target Cost, except some cases wherein
detailed design commences prior to agreement of the Final Target Cost. This
mechanism provides good accuracy of the estimate at this final stage before
construction commences. The final stage is now not an estimate but the record of
actual cost and will determine the amount of pain/gain and possible final bonus to be
awarded to the ECI contractor. ECI has been found with potential to enable projects to
be delivered in time and budget in the construction phase. But it has no coverage to
maintenance cost. There may be significant cost savings in future road maintenance if
more capital is invested for improved or better pavement design. The trade-off
between capital spent and operating cost is observed by private contractor while
bidding for Private Finance Initiative (PFI i.e. UK version of PPP) and DBFO
arrangements. However, in case of no incentive for the contractor to do this in ECI for
routine and Design and Build contracts, this aspect is missed. Hence whole life cost
considerations are covered in the business case for the investment and then
incorporated in the initial brief or design standards by HA.
ECI is basically a partnering approach in which the contractor is appointed at an early

stage of project development to assist in planning, assessing buildability and cost
estimating in advance of route development and the statutory process. The contractor
is then incentivised to design and construct the scheme within an agreed Target Price,
based on a pain/gain share formula. Contractors are benefited from reduced tendering
cost (as they no longer need to carry out design for competitive pricing), lower
contract risk and slightly enhanced margins through the incentive formula - although
the profit potential is less. Some of the principles of ECI contracting are commonly
used in the water industry and other sectors, as well as in Highway Maintenance
Framework contracts. But it is yet a new concept with limited cases.
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Following benefits / disbenefits are observed for ECI in UK (Nichols 2007).
Benefits:
o enables the contractor to influence planning decisions and design development

at the most beneficial time
o potentially reduces preparation time for projects by 30-40%, by carrying out

some parts of the development process simultaneously rather than
consecutively (reducing time from programme entry to start of works from 10
or more years down to around seven)
o gives HA access to detailed cost data to improve future estimates and output
measures
o provides greater cost certainty, once the Target Price is agreed
o increases innovation which was being lost on D&B contracts; and facilitates
value management and value engineering which can result in major cost and
time savings
o enables tenderers, in the procurement phase, to prepare budget commentaries

on the cost level which should lead to more accurate budget estimates
o requires the preparation of outturn estimates at key stages throughout the

project cycle. This leads to greater cost control during the construction phase,
especially as the incentive formula is based on the Target Price, set before start
of construction
o provides a team/alliancing spirit which leads to an open and honest process so

that the real costs are highlighted early, before Ministers make a commitment.
Disbenefits:
o ECI was adopted as a preferred procurement option and applied to most of the
schemes, after only limited piloting. The ECI process is still being refined.
There currently have been only five schemes completed using ECI fully as the
method of procurement
o there is a significant difference between the culture needed to achieve a

successful ECI contract from that for a D&B contract. Typically, the
contractors have gone through successful change management processes but
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the Highway Agency still need more recruitment and training to embrace folly
the cultural needs of ECI.
o since ECI was introduced, there has been very little training provided resulting
in a lack of commitment from HA staff at all levels. This has resulted in HA
lacking the ability to set sensible budgets, challenge Target Prices and manage
the process effectively
o some duplication of costs is occurring in early design, especially where HA’s

consultants feel disconnected from the process and do not totally enter into the
team culture
o the initial incentivising mechanisms have not worked well in a number of

ways. Firstly, the pain/gain incentive formula operates properly only if the
early cost estimate is reasonably robust, but it has tended not to be. Hence the
design bonus (paid only if design attains cost lower than Target Price) has not
yet been earned on any scheme. Secondly, the ability for contractors to earn
any significant construction bonus in addition to their tender margin (of 2.5%)
is severely limited.
The ECI is yet a new development evolved in UK and no much database is available
for scrutiny. But its evolution is through practical considerations and sounds sensible
if the implementing agency is sound in assessing proposals of contractors in public
interest. Otherwise, the contractors can drive the projects to their end on commercial
front.
3.5.8 Prequalification Criteria in Europe:
Regarding procurement of contractor, prequalification practice has wide impacts.

Netherlands do prequalify contractors on a project basis (for complex projects), but
they do not take past performance into account because they are restricted by law
from doing so. Germany has no formal or annual prequalification processes. The
prequalification is also employed by Canada and US for better PSP.Ontario Ministry
of Transportation in Canada has developed a system to prequalify consultants and
contractors called the Registry, Appraisal, and Qualification System (RAQS). An
annual contractor prequalification system similar to many US systems is used, but it is
a little more reliant on past performance. All contractors are prequalified on a basis of
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financial status, performance appraisals, and infraction reports at the end of each
project establishing an overall performance rating. The rating is maintained on a 3-
year rolling average. All contractors must have a financial rating, which is based on
assets and cash. Contractors can bid only up to their available financial rating & other
factors like penalty adjustments, and work on hand. In England, they maintain a
"long list" or general prequalification of contractors on the basis of financial standing
and technical capability, and then selectively produce a project-specific "short list" to
distribute work to multiple contractors in the marketplace to maintain a healthy level
of competition. In preparing short list, each company is assigned a "vendor rating" on
the basis of its capability, past performance, and other strategic data. Contractor
prequalification & use of past performance information is not common in most US
State highway agencies. Only a few States, however, use contractor prequalification
on individual projects as practiced by other international organizations. In fact India
has practice of inviting prequalification for a project based on estimated cost of
project. Hence, most of major highway projects are subject to strict prequalification
before entering financial biding.
As far as bidding basis is concerned, Finland, England, and Scotland use best-value
procurement dominantly. Germany and Ontario award construction contracts on the
basis of low price, but can use best-value procurement when project characteristics
requires. The Netherlands uses best value more frequently than Ontario and Germany.
The Netherlands uses it for all design-build projects and also on selected design-bid-
build projects, specifically for those projects in which it shortlists contractors. The
purpose of best-value selection is to balance cost with non-cost factors to achieve
long-term performance and value of construction for the public. Hence, bidding is
done with two cover system -one is technical bid which is evaluated first and then
second cover of financial bid is opened. The manner in which tradeoff analysis is
conducted between the price and technical proposals varies by country and among
projects within each country. Some examples only employ two criteria of price and
qualifications or past performance. If the lowest price comes from the highest
technical rating, then the project is awarded to the lowest bidder. If the lowest bidder
does not have the highest technical rating, then the agency performs a tradeoff
analysis to determine if the higher technical scores provide the public with better
long-term value. If it can be determined that better value is achieved from one of the
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higher technical offers, then the award is made to someone other than the lowest
bidder. In India, the two cover bidding is common for major projects but no tradeoff
analysis is done to compare cost & non-cost factors.
For concession based projects, it is relevant to note that The Public-Private

Comparator (PPC) is employed in Netherlands & UK to make a financial
comparison of the viability of using a concession versus keeping a project in the
public sector. The PPC compares the NPV of the concessionaire’s proposal with the
traditional cost of design, construction, maintenance, and operation in the traditional
method. The PPC is thus useful in comparing PPP proposals for various bidders and
also for comparing with traditional mode of state execution.
3.5.9 Public Information System During Construction:
Aspect of informing likely to be affected parties (mainly utility carriers) simplifies

construction problems on site. The public must be kept informed before, during, and
after construction. The responsibility for public information varied slightly from
country to country. The highway agency takes primary responsibility for public
information in Ontario, Germany, the Netherlands, and Finland. The contractor takes
primary responsibility for public information in England and Scotland. In India, such
co-ordination is mostly missing and hindrances are solved as they are met with. This
delays the projects in India quite often in addition to hurdles for road users.
3.6 INTERNATIONAL EXPERIENCE FOR PSP PROGRAMMES ON

CONCESSIONS:
Following country specific experiences for PSP and in particular on concession

elaborates ground realities in achieving desired success despite initial thrust from
Government. The international experience can be a good input for country like India
which is yet on learning curve of PSP and in need of harnessing benefits of
concessions. The concessions referred hereunder may involve private funds (i.e. PPP)
or it may be limited private sector participation and it also refers to publicly managed
tolling. It should be noted that PSP/PPP routes of development are found applied to
only superior category of roads world over and such roads form not more than 10 to
20 % of total road network for a country.
ill
3.6.1 Use of Concessions in Portugal for Strategic Road Development Plan:
As given in Table:III-3, Portugal has total 2271 km of superior roads out of which
1771 km are managed by private concessionaires and no concession is awarded to
public body. Portugal plans to bring almost its entire superior network under private
concession in near future in this decade. The Portuguese Highways Agency, Institute
das Estratas de Portugal (IEP) has made major changes in its methods of doing
business to plan completion of 2,700 km through concessions by 2006 from 431 km
of concessions in 1991. The primary driver for the Portuguese concession plan was
Portugal’s entry into the EU which necessitated strengthening trading capabilities.
Historically, the first concession for the building of a tolled motorway network dates
back to 1972, with the creation of the private company BRISA to which it was
granted. After 1974 revolution, the majority part of the capital of BRISA was taken by
the Government, and it became practically a public company. BRISA run almost all
network then onwards. Again in 1998, limits of the concession of BRISA were
redefined—that is, from being the concessionaire of “all” motorways, BRISA was
limited to major stretches of length of 1180 km. It is mainly failure of BRISA to
construct more highways and growing needs invited more private participants in this
sector. The major observations for the concession of Portugal highway sector are
(Cox et al. 2002):
* Generally Portugal allowed concessions where alternative free lanes of good

quality were available. But From 1998, the quality of optional freeway was
ignored and that raised opposition to tolling. Public did not mind keep paying
BRISA on main links but refused to pay for new links. The new projects were
not seen attractive in traffic terms & hence the new projects were not benefited
by competition and this also affected project viability. The Portugal operates
real tolls & shadow tolls both and shadow tolling is needed when alternative
route is not rendered.
* The concessions were needed to elaborate risk allocations. The party best able
to manage the risk bears is allocated that risk. Like the risk of planning
remains with the government. The risks associated with design, construction,
operation and maintenance, latent defects, and legislation are assigned to the
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concessionaire. The responsibility for environmental, land acquisition and
Force Majeure events is shared by both. The major risks felt were -
Environment clearance & Land acquisition. The Environmental risk was
mitigated by government by getting clearances before inviting bids but
politically it was not always so. For land acquisition, concessions have
involved a transfer of significant right-of-way risk to concessionaires, by
transferring more and more of the expropriation activities to them.
Concessionaires manage negotiations, and the government provides the public
interest declaration. If contended, the court matter is handled by the
government. This is an excellent feature of PPP.
3.6.1.1 Selection Process for Concessionaire:
The selection process for concessionaire in Portugal is narrated below that explains
preparatory works undertaken by European countries while going through concession
route.
Figure: UI-5
Portugal case of selection for Concessionaire
Publicity of Intention for Inviting Bids
Bids preparation & presentation Time: 5 months
Presentation of Bidders to EIP
Bid evaluation Time: 6 months
nr
Two Bids Short listed
Negotiation
TT
Awarding of Contract
Time: 4 months
Finalizing legalities Time: 3months

12
Financial Closing of Concession
Total Time: 1 8 months

(Derivedfrom Cox et al. 2002)
As illustrated above, potential concessionaires are given 5 months to prepare then-

proposals following receipt of the request for tenders. They prepare proposals for
presentation to the IEP. Since the proposals involve design, construction, operation,
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maintenance, and other services, the evaluation takes up to 6 months to complete. The
proposals are evaluated based on the Technical quality; Government’s financial
effort; Expected net present value (NPV) of ; Level of risk and commitment;
Proposed date for full operation; Robustness of financial and contractual structure.
Two proposers are short listed and the IEP enters into competitive negotiations with
both. The final completion of the contract terms and contract award etc. formalities
are accomplished in 3 months. Thus entire selection process takes an average of 18
months to complete. This period is almost three fold of Indian way of selecting
concessionaire. In India, only most attractive stretches are taken up for concession and
practically a model concession agreement format is followed with no attempts to
control cost or price.
3.6.2 Use of Concessions in France for Strategic Road Development Plan:
The France has a long history of PPPs and concessions. Its first concession is as old as
in 1554 for the construction of a canal. The major observations for the French
highway sector are:
* The French use a real toll system with all of the cost for the roads being borne
directly /indirectly by the user. Tolls account for 65 percent of the capital
motorway costs, with 19 percent from the government (3 percent for
maintenance and 16 percent for building) and 16 percent from the local
authorities (nil percent for maintenance and 16 percent for building). The tolls
themselves are used for financing (63 percent), toll collection costs (26
percent), and taxes (11 percent).
* The French motorways system has steadily grown from 1,125 km in 1970 to
more than 11,000 km in 2000 (75% are tolled) and they carry more than 30000
vehicles per day per motorway on average (Lecofifre 2003). The other
national roads are 32000 kms and in total 8,00,000 kms of lower category of
roads. The tolling is authorized by 1955 Toll Act for creation of state owned
toll road companies who will collect tolls for construction and maintenance of
highways. Under state ownership profitable toll roads supports weak roads. By
2003, 8000 kms of toll roads are built under Toll Act (1955) and under
operation. From this, 7200 kms are operated by 6 mainly publicly owned
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companies (ASF, SAPRR, SANEF, ESCOTA, AREA, SAPN) & remaining
800 kms operated by a private company (COFIROUTE). In France toll rates
are fixed by government but rates vary up to 30% over the region, type of
vehicle and hour of day. Such variable tolling was started from 1992 and
intentions are not to increase revenues. The toll rate is increased annually just
above inflation. The present trend is handing over federal roads to local
bodies.
* There were nine primary concessionaires working in France, among them

Cofiroute was fully private (Cox et al. 2002). Central and regional government
bodies run the remaining eight regional concessionaires through limited
liability semi public companies (SEMs). Some of the more profitable SEMs
support the other less profitable ones.
* Some public companies use private “firewalls” to compete with the private
sector. SEMs are financed by the Caisse Nationale des Autoroutes (CNA), an
autonomous public agency that raises the funds for highway construction.
Private utility companies often operate SEMs under short term contracts.
* A 1985 law seems governing the client process, the quality, the cost, and the
principles upon which the project is based. It also describes the roles of the
engineer and contractor. This law states that the client must participate
throughout the entire process. If the public owner does not have the necessary
expertise, it can employ an owner’s representative or a firm to do the job. But
this responsibility cannot be totally transferred to third parties, as the law
requires the owner must be present at all critical points in the process. As a
result, the owner must have a construction manager separate from the
construction team. This stipulation insists delivery of public obligation whole
heartedly which is a unique feature.
* The public sector client must state/elaborate the needs of the public (as
decided by State) through a “program,” which is interacted upon by
contractors or the concessionaires. The client must define its needs in the
“program” and assess the costs. There are two milestones of cost assurance—
one at the program level (at declaration of intention) and one at the bidding
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time. If the bid costs are higher than the target, the engineer has to redesign. At
the end of the project, the client approves the final product.
* The risk allocation profile is illustrated as reproduced below which is similar

to Portugal and many European cases. To deal with land acquisition problems,
Cofiroute and the other SEMs can purchase right of way on behalf of the
government. Though the revenue, construction and financial risks are most
important to affect commercial viability of concessions, they are left to the
Concessionaire on risk -reward understanding.
Table: HI-5
Risk Allocations Strategy under French Concessions
Type of risk Who bears
Revenue and traffic risk Concessionaire
Construction cost risk Concessionaire
Financial risk Concessionaire
Operation cost risk Concessionaire
Project risk Government
Force Majeure Government
Government action Government
(Source: Cox et al. 2002)
A worth mentioning brief overview of latest trend of French government is selling of

own stake during 2005(Europa 2005) in three major toll road companies: a 50.3%
stake in Autoroutes du Sud de la France; a 70% stake in Autoroutes Paris-Rhin-
Rhone; a 75% stake in Societe des autoroutes du Nord et de l'Est de la France. The
proceeds were estimated to generate EUR 10 billion revenue and a portion of the
money raised was decided to be allocated to the Transportation Infrastructure Funding
Agency. The sale of majority stakes in three state-controlled toll-road operators was
completed for a total price of $17.8 billion i.e. more than 1.5 times of expected
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revenues were received. Vinci purchased France’s 50 percent stake in Autoroutes du
Sud de la France, which operates roads in southwest France. Eiffage and Macquarie
Infrastructure of Australia purchased France’s 70 percent stake in Autoroutes Paris-
Rhin-Rhone (APRR), which operates roads in southeast France. A consortium led by
Abertis bought a 75 percent stake in Societe des Autoroutes du Nord et de 1’Est de la
France (Sanef), which operates roads in northern France. Analysts do not see these
privatizations to amount to much more than a drop in the bucket if France is thinking
for restoring financial health. On the contrary, the Government was criticized by
politicians and unions saying that overall impact of wind fall revenue by selling stake
on State debt will be 4.5%, whereas intrinsic annual yield from these shares stands at
7.5%. The French initiative is like predecessor to US selling out Chicago skyway or
Indiana toll road.
Another major decision was to hand over less important national trunk roads to local
departments with attached 33,000 civil staff. Minister of Transportation, Dominique
Perben, presented a map indicating administration of 18,400 kilometres of national
trunk roads to be transferred to the departements from January 2006. The
departements are currently responsible for approximately 360,000 kilometres of
regional roads. This is under August 2004 Decentralisation Act and is quite
contradictory to NHAI practice of divesting local departments ofN.H. The transfer of
roads to local departments is seen as Government undermining its role on whole
network.
3.6.3 Spanish Concession Practices:
The Spanish Civil War at the end of the 1930s left the country extremely poor, a
situation that persisted for decades. In the 1960s, the government realized that build
ing infrastructure such as roads was crucial for tourism and for the development of the
country. Spaniards were very poor with a very low income per capita and hence there
was not enough money in the system to be invested into the country’s development.
Taking a bold decision, the government authorized the companies that would become
the concessionaires to dip into the pockets of their partners in richer countries (Oraber
2006). Those foreign loans provided the capital for the toll roads, with a backing from
the Spanish Government assuring a return on the investment if the toll income did not
meet expectations. The process of using toll roads to build infrastructure began in the
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1960s and 1970s, in Spain & other European countries. France and Italy chose the
model of having state-owned companies develop the roads, as opposed to the
primarily private Spanish model. The government awarded the first road contracts at
the end of the 1960s and these roads were completed by 1970s. Meanwhile, the
economy was struck in 1973 by oil crisis. Hence at the inception, the PPP saw
unusual erosion of viability.
In 1967, the Spanish Government planned for 3,160 kilometers of toll motorways in
the Program of Spanish National Motorways (abbreviated as PANE). Up to 1972 the
sections were franchised to private firms. The possibility of having motorways (even
if tolled) raised great expectations, and political and institutional pressures to acquire
such roads emerged all over the country (Bel & Fageda 2005). The PANE was up
dated by 1972, included 6,340 kilometers of toll motorways. Promises were high, but
results did not meet expectations. The concessions were franchised for total of 2,042
kms up to the end of 1975. By 1985, no more than 1,807 kilometers of toll motorways
were operating, along with 1,363 kilometers of free motorways. This is mainly due to
economic crisis of seventies that discouraged private investors to go ahead till mid
1980s. In the PANE, Spain did not prefer public management (like in France & Italy)
but loan warranties were availed to private concessionaires to obtain overseas funds.
This decision attracted risk transfer on Government for exchange rate on external
borrowings. Some or other way likewise many risks were ultimately passed on to
Government and ultimately private toll roads resulted in to a costly affair. Bel &
Fageda (2005) observed that Italy faced less problems from crisis because it followed
network based management for balancing profitable & unprofitable stretches whereas
Spain franchised individual stretches. As a result, a political decision of choosing
model of public financing of motorways for 1984-1991 Roads General Plan was
taken by newly elected Socialist party. The new model really clicked to produce
additional 3600 km freeways during 1986-92. Fiscally this was seen possible due to
introduction of Income Tax from 1977 & availability of European Community funds
on some stretches of European importance. The table: III-6 depicts this trend.
However, during late 1990s with out competitive pricing unprofitable concessions
were facilitated by renegotiations for increase in term & in return reduction of toll or
State investment in unprofitable stretches. This has resulted in implementing yearly
price adjustment formulae wiping off extra ordinary profits of private parties through
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capping. In survival of private toll ways, National Toll Motorways Program approved
by the conservative government elected in March 1996 & 2000 helped without
harming development of freeways. Also, it allowed subsidies for poor traffic stretches
on private toll ways. The socialist party again gained the power around 2004 and is
likely to downsize remaining of Toll Motorways Program.
Table: III-6
Spanish Toll Road & Toll Free Road Development
Year Total Toll % Free %
Motorways motorways Toll/Total motorways Free/Total
1970 203 82 40 121 60
1975 888 619 70 269 30
1980 1933 1530 79 403 21
1985 3170 1807 57 1363 43
1990 5126 1898 37 3228 67
1995 8133 2023 25 6110 75
2000 10480 2239 21 8241 79
2003 12009 2517 21 9492 79
(Source: Bel & Fageda :(2005))
The basic issue for Spain is noticed to be lengthy tendering process as referred below.
The price escalation becomes effective after one year and hence this case the
proposals are likely to see change in estimates significantly. It is very complicated to
see that all the bidders have same set of information over such lengthy period of 33-
44 months but offers are expected to come varying.
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Table: HI-7
Procurement of PPP Road Projects in Spain: Average Timescales Tendering
Phase
Phases in Tendering Action to be Average Time
Taken by Taken
Preliminary study & Environmental Impact Grantor 8-10 months
Assessment (EIA)
1st Public Information process Grantor 1+1-3 months
EIA Approval and development of basic Grantor 4 months
design
Basic Design Approval Grantor 1 month
2nd Public Information Process Grantor 1+2 months
Tender Document preparation Grantor 2 months
Approval and announcement Grantor 8-10 months
Tender Period Bidder -
Tender Evaluation and Awarding Grantor l+l-3months
Concession Co. incorporation Bidder 4 months
Detailed Design Bidder 1 month
Land acquisition or occupation B/G 1+2 months
TOTAL 33-44 Months
(Source: Derivedfrom De Vera 2006)
As far as entrepreneurship is concerned Spain is guiding the universe and they run
concessions in 26 countries. In the case of private investors, it is interesting to
mention that three construction groups control the 90% of the network under
concession (Abertis, Itinere and Cintra).The Abertis motorway network covers a high
proportion of the toll roads in Spain, with a turnover representing between 70 and
80% of the total business in the sector. These groups have a global dimension because
of their participation in concessions granted around the world. For example, these
three Spanish firms played an active role in the French privatization process as main
investors and Cintra is active in buying toll roads in US. Spanish firms’ profits in the
sector in Spain range from 130 million euros in 1990 to more than 600 million in
2002 and is well supported on Madrid stock exchange. Though Government offered
to buy stake in private toll companies in 1970s to help out of economic crisis, many of
these firms stood firm for long term business and they really made it in long run.
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3.6.4 Private Finance Initiative of UK:
UK has been leading in running PPP projects under Private Finance Initiative (PFI).
The motorway network (Lam 2006) in UK was developed in 1960s and 1970s with
public funds and with out charging tolls. Very first privately funded (BOT type)
project for UK was Channel tunnel for which construction was started in 1987. The
Dartford- Thurrock Crossing and second Severn bridge were the only names up till
now for this list of BOT projects. The latest addition is M6 toll motorway(2003).
The UK is more interested in DBFO type of projects without imposing direct tolling,
even today. The DBFO model was introduced in 1993 under PFI of UK government.
The UK Highways Agency is responsible for motorways and major roads in England
and has been involved in development of "shadow tolling" or DBFO projects. The
Highways Agency had launched its DBFO Road Program in August of 1994, and
since then ten projects involving 770 kilometers of roadway with an estimated
construction value of US $1.9 billion have been brought to financial close. This is
hardly around 5% of highway network handled by Highway Agency. Presently 10%
of current schemes are on DBFO basis and Agency targets to take up 30% of schemes
(Clarke & Johnston 2006) on DBFO basis by 2010. The UK idea is clear that no
direct tolling is preferred and various value based innovations are implemented under
scrutiny of Public Sector Comparator.
Summing up, Europe has successfully seen use of PSP with innovations (without
financial investment from private sector) and to some extent concessions for creating
and maintaining huge network of superior roads. However, public nature of roads as
an asset has compelled Governments to vary scale of private sector involvement in
such programmes over the period of time. As compared to this, patron of market
based economy i.e. US is having major event of a huge public funded Interstate
programme(1956 onwards) which is then followed by no major road development
programme by any means (public/private) finance. Now all states of US are setting up
legislation for PPP. The FHWA of US recent statistics (Perez 2006) indicate that tolls
are currently collected on roads in 25 States and one US territory on 4,630 miles of
the 162,000 mile National Highway System. Thus toll roads are around 3% of total
N.H. system. Overall there are approximately 25 discrete Interstate toll roads and
about 65 significant non-Interstate toll roads in operation. After enacting the
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Intermodal Surface Transportation Efficiency Act of 1991, total of 168 new toll
projects are at various stages of development including opened for operations and it
has required investment of $79,903 million. Basically, US are yet on the road of PPP.
3.6.5 PPP in Latin America and Caribbean countries:
As noted in Table: III-2, Latin America and Caribbean countries are leading group of
countries in pursuit of PPP and hence gone through huge private investment in
development and maintenance of roads. India is rushing towards almost similar type
of PPP projects under NHDP and hence it is most relevant to review major
developments in this region. Unfortunately this region has seen many down falls
while following PPP as evident from discussions below. It is basically story of
excessively optimistic demand forecasts made by Governments in Latin America and
Caribbean countries coupled with poor concession design and a hurried pace leading
to financial disaster and renegotiation. The World Bank (Guasch 2004) report on
renegotiation suggests that transportation concessions were met with renegotiation
proposal within reaching three years on average in Latin America and Caribbean
countries. The proposal mostly came from operators/concessionaires but some times
also from Government. The operator driven proposals were mostly for price cap
related issues. A summary of points of contentions and subsequent outcome observed
by World Bank in studying almost 1000 concessions in infrastructure works
(including toll roads) executed in Latin America & Caribbean countries during 1980-
2000 is explaining problems due to poor contract design & administration. As
expected, negotiating with operators, it is the Government who mortgages public
interest in this process. Mostly, these renegotiations are on non competitive basis and
least subject to public notice.
The Table: III-8A and B are summary of World Bank study of 1000 concessions for
infrastructure (including 276 concessions for transportations) in Latin America &
Caribbean countries. Since all concessions are related to public utilities, the
implications are equally relevant for concessions in road sector.
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Table: III-8: A
Contract Features and the Incidence of Renegotiations for Infrastructure
Concessions in Latin America and the Caribbean, Mid-1980s to 2000
Feature | Incidence of Renegotiation (percent)
Award criteria
Lowest tariff 60
Highest transfer fee 11
Regulation criteria
Investment requirements (regulation by 70
means)
Performance indicators (regulation by 18
objectives)
Regulatory framework
Price cap 42
Rate of return 13
Existence of regulatory body
Regulatory body in existence 17
Regulatory body not in existence 61
Impact of legal framework
Regulatory framework embedded in law 17
Regulatory framework embedded in 28
decree
Regulatory framework embedded in 40
contract
(Source: Based on Guasch: WBI Development Studies (2004))
As presented under Table: III-8: A, when concessions were awarded on lowest tariff
basis, 60% of such awards attracted renegotiations. Similarly when the utility was
regulated through price capping, it underwent renegotiation in 42% of cases. The
incidence of renegotiation was lower when regulatory framework was embedded in
law (i.e. supported by law) and a regulator existed.
The details presented under Table: III-8: B explains major outcome occurred in favour
of operators. The outcome of 69% of total renegotiated concessions was relief to the
operator from scheduled investments conceding the arguments of operator for
changed market conditions. Similarly 62% of renegotiated concessions resulted into
tariff increase. The extension of concession period was the outcome for 38% of
renegotiated concessions. Government was also found able to get tariff reduced in
19% of renegotiated concessions. The Government was found requesting for
renegotiations based on noncompliance of agreed terms by operator, changing
priorities for that sector, electoral reversals etc.
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Table: HI-8: B
Common Outcomes of the Renegotiation Process for Infrastructure Concessions
in Latin America and the Caribbean, Mid-1980s to 2000
Renegotiation outcome Percentage of renegotiated concession
contracts with that outcome
Delays on investment obligations targets 69
Acceleration of investment obligations 18
Tariff increases 62
Tariff decreases 19
Increase in the number of cost 59
components with an automatic pass
through to tariff increases
Extension of concession period 38
Reduction of investment obligations 62
Adjustment of canon^-annual fee paid by
operator to government
Favorable to operator 31
Unfavorable to operator 17
Changes in the asset-capital base
Favorable to operator 46
Unfavorable to operator 22
(Source: Based on Guasch: WBI Development Studies (2004))
Guasch (2004) pointed out from Latin America & Caribbean experience for
renegotiations that all the renegotiations were not opportunistic renegotiations. In fact
it was the inadequacy of provision of concession agreement that was brought out by
needful or opportunistic renegotiations. He was however wary of the fact that such
renegotiations wipe out expected benefits of competitive bidding since outcome of
such renegotiations do not face competition.
The renegotiation history of Latin America & Caribbean countries is thus indicative
of complexities in implementing concessions. As far Mexico is concerned, it had 91
concessions for transportation in above sample of 1000 concessions. Out of these 91
concessions, 51 concessions met with renegotiation which is quite high (50%)
proportion. Additionally, worldwide, out of a total of2,485 projects granted in 1990-
2001, 48 private infrastructure projects were canceled with total investment
commitments of US$19.8 billion. Of these, 19 were toll roads & all were in Mexico
(Harris et al. (2003)). Under this background the Mexican toll programme is found
cynosure for any country heading for PPP.
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3.6.5.1 Toll Road Programme - Mexico:
Mexico is a large country both in terms of geography and population, covering around
2 million square km (roughly 4 times the size of France), it is the 14th-largest country
in the world by surface area. Its population exceeded 100 million people (July 2006
estimate). Mexico is the 11th most populous nation in the world. Mexico is identified
as one of the world’s seven largest emerging market economies (with China, India,
Brazil, Indonesia, Turkey, and Russia) looking to annual GDP recently exceeding
around $800 billon.
In 1989, then President Salinas announced the National Highway Program for 1989-
1994 to extend concessions to private Mexican entities to build 10,000 miles of
modem, high velocity highways. Mexican government, through its Secretariat of
Communications and Transportation (SCT) undertook to improve, upgrade, and
extend the strategic highway network by way of an ambitious concession program
during period 1989-1994 (Rusterl997 and Ortiz 2006). Between 1989 and 1991, the
Salinas administration directed some $4.6 billion of investment toward road
development and improvements nationwide, $3.4 billion of which was financed by
Mexico's private sector through concessions. By the end of 1994, a total of 50
highway concessions had been awarded, representing 3,300 miles (i.e. 5300 km) of
highways and eight bridges. The required investment of around $13 billion was
financed through the domestic banking sector (50%); considerable concessionaire
equity (30%), funded through expensive, limited-tenor, floating rate commercial loans
and/or “sweat equity” (an arrangement whereby a construction company builds a
facility on behalf of a concessionaire, to be later compensated through the reward of
an equity state in the concession); and a remaining 20% came from public-sector
grants/equity. The spectacular financial failure of this program is legendary and it is
used in academic texts and on finance courses as an important example of what can
go wrong with overenthusiastic large scale, national infrastructure concession
programs. The salient features and issues of 1989-94 toll road concession frame work
were as below.
4 If two or more Mexican States were connected by road or bridge by the

proposed project then concessions were issued under federal “Law of General
Means of Communications”, provided a free parallel highway was available.
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Earlier the concession period was limited to 15 years and was extended to 30
years later under this legislation. The precondition of free alternative was
found fatal to viability of programme.
The concessions were granted to special purpose vehicles which were in
reality either directly owned by or affiliates of one or more local construction
companies. But the scope of concession was far above routine construction
project. It required financing and collecting the tolls also along with
maintenance. The concessionaire was supposed to estimate demand on toll
road and free alternative as well and to phase out investments taking care of
financial programme. The concessionaire was to pay certain fees to
government and to maintain reserve funds for maintenance. The assets were to
be transferred to government free of cost at end of concession. The ownership
of project was vested to government through out the project term
4 The role of government was to decide and design project for lanes,
interchanges, toll booths, construction standards, tendering procedures. The
supervision was done by government. Government was thus attached to all
aspects of physical work similar to a typical cash contract.
If actual volume of traffic fell short of quantity specified in concession, he was
to be compensated by proportionately extending the term of contract. This was
a sort of guarantee which broke the spirit of private sector participation. The
local banks blindly lent to such projects considering ultimate recourse to
Government.
Toll levels were set forth for all categories of vehicles. This toll level was
subject to semiannual adjustment for consumer price index. If CPI increased
by 5% above previous adjustment, the corresponding increment to toll was
made. It was trend to set initial toll level at very high level looking to no other
scope to hike the toll rate in real terms then onwards.
Bid submission deadlines were so close that left limited investigative or
general preparatory time. Bids were not required to be accompanied by
detailed financial or operational information. Hence the resilience to stress or
sensitivity analysis while reviewing financial proposal was not
accommodated.
The road concessions were awarded to the bidder offering the shortest
concession period, with a maximum legally permitted term of 15 years then.
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Perhaps Government wanted to get back the enhanced asset in the shortest
period of time and thereby avoid public pressure for privatizing the public
properties. In response, bidders proposed average term around 10 years and
some times even in months. The subsequent cost-recovery requirement to
repay debt and make payments to equity providers in these short periods
placed intense upward pressure on tariffs. Consequently, the users of Mexican
toil roads became among the users of most expensive toll roads in the world.
For example, toll rates were pegged around 16-62 US cents/km in Mexico as
compared to 2-9 cents/km in the United States. This in turn, led traffic away
from the toll roads (particularly trucks) and hence revenue receipts went well
below expectations. More than half of the toll roads reached less than 50% of
the forecast volumes.
All the lacunae in design of concession and hasty implementation of programme

accompanied by drastic under receipt of toll revenues marred the commercial sense of
project. Meanwhile Mexican peso (currency) crisis forced the Mexican Government
to devalue the peso in December 1994 & by the end of December, the peso had fallen
by 66%. GDP fell by 6.2% and the rate of inflation on a 12 months basis climbed to
52% in December 1995. Short-term interest rates reached a level of 71.5% in April
1995. This crisis raised all-in interest rates to 100% and affected cash flow of toll
projects in deadly manner.
The falls out of overall pathetic conception of programme were:
No proper prequalification or detailed bidding requirements were enforced

and bidding criteria suited most to local contractors who were merely
interested in civil job. This lack of scrutiny was also followed by non diligence
on lenders part. Hence no body really checked the feasibility of proposal for a
given case.
The project cash flow was not supported by availability of long term fixed
rate financing. The local Peso denominated debt was for around five years but
interest rates pegged at 1000 to 1500 basis points over those paid by
Government.
The poor selection of project led to piecemeal development instead of corridor
development. Inter modal transport strategy was not worked out.
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4 The Government body was not capable to give timely scrutiny & approvals.
4 Cost overruns & time overruns were evident due to incomplete information &
poor coordination in Government. A 30% increase in cost was noticed on
average. The design changes, local public resistance, not making prior land
acquisition etc. raised the estimated construction cost of US$ 1.7 million to
US$ 2.6 to 2.8 million. In a case, the cost increased by 200% and time delay
was by 320 more months. In another case, scope of four bridges was changed
to sixty bridges to appease local interest groups. Mexico-Toluca highway
concession is an extreme case of extending concession period. The Mexican
government granted the concession for Mexico-Toluca highway in 1989 to
Promotora de Administracion Carretera S.A., a TribasA-owned special-
purpose vehicle company. The concession for a very limited term of two
years, four months included the construction and operation of the toll road. In
1991, this term was extended by 11 years (for adjusting for actual cost and
revenue) and extended again in 2002 upto 2013, as compensation for
additional construction works and then in 2006 revised upto 2031, as
compensation for a negotiated tariff reduction. Thus an increase of 40 years
itself reveals inadequacy of concession in handling PPP agreement.
4 The 1994 crisis resulted in to economic stagnation & freight movement. More
over, the traffic prediction was poor from Government and concessionaire
side. Standard & Poor’s (Ortiz 2006) collected & analyzed toll road traffic
statistics from all the federal concessions (115 in total including 73 highways
and 42 bridges) from 1994 to 2005. The traffic growth for the past 10 years
has been found positive, with an average strong growth of 8% but the year-to-
year variation was considerable (-12 to +14.0%). The -12% from 1994 to 1995
is owing to economic crisis in 1994. As generally checked, there is a positive
relationship between GDP and toll road traffic growth in Mexico, but this
relationship is not explicit here. Running a simple linear regression of GDP
growth against traffic growth reveals an R-squared of 0.70. Thus, around two-
thirds of the variability in the traffic growth data set is explained by GDP. For
remaining explanation, it was seen that each asset behaves according to
regional patterns rather than national in large countries like Mexico. The
average error from the data set of 32 projects, as on 1994 was 26% (actual
traffic, turned out to be 74% of the forecast), the spread of the distribution that
128
causes the most concern. Only five out of 32 projects saw actual traffic as a
percentage of guaranteed traffic exceeding 100% mark. The inherent
complexities in traffic estimation is narrated by Standard & Poor’s (2006)
saying that even one-year-ahead projections for mature, operating facilities
can be accompanied by error ranges of 10% to 20%.
In some projects, trucks were found only 5% of total users as against estimated
share of 20 to 45 %. A toll bridge was expected to cater to 5000 trucks per day
met with only 200 users per day. These are more of examples of not
harnessing demand efficiently in wake of Government underwriting.
Despite historic painful problems with toll roads, Standard & Poor’s (Ortiz 2006) have
recently rated the 10 Mexican toll road agencies and results are very stable except
one. Four of them are rated AAA i.e. world class. This transformation is due to many
corrections applied by Government after 1990s. The federal government initiated
rescue programme by taking over 20 concessions (out of 52) vested to 22 highways
(total 3400 km) and assumed their outstanding bank loans amounting around $ 5
billion by means of a new government entity, Fideicomiso de Apoyo al Rescate de
Autopistas Concesionadas (FARAC) through the National Development Bank i.e.
Banco Nacional de Obras y Servicios Publicos (BANOBRAS). No compensation was
provided to equity holders who probably lost around $3 billion. As a correction, the
Mexican federal government has started practice of preparing National Development
plan for its term which assigns priorities to various highway projects. The MCT has
developed New Concession Model for toll roads and recently Public-Private
Association Scheme (PPS) for toll free roads. PPS is like shadow tolling but very few
projects are undertaken. The New Concession Model is under implementation from
2003. In 2003, Mexican President launched $1.2 billion highway PPP programme
with toll ceilings and $ 800 million public money support. The major policy shift in
biding criteria and concession design is explained below.
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Table: III-9
Mexican Toll Programme Corrections
Aspect of Concession Corrections Post 1994

Term Extension of Term of 32 concessions which were not taken over was
existing concessions extended on average by 20 years to safe guard lender’s
interests.
Toll Rate revision of Tolls for Government undertaken concessions were reduced,
concessions taken over 40% was reduced for trucks.
by Government
New Concession Bid documents are more detailed and any further
award criteria information is available if bidder asks. The time limits for
bid study and submission are extended favourably. The SCT
prepares an Executive Project & bidders may propose
changes to it mentioning upfront and later on public subsidy
required by bidders. The bidder shall incorporate technical,
economic, and legal conditions in his proposal. The
concession will be awarded to the bidder who will provide
technical and financial proposal that fulfills the necessary
requirements and to the one that will need the smallest
amount of public funds. The bidder demanding lowest
initial grant required at construction stage and Subordinate
Contribution Commitment (to be discounted at rate specified
in bid, generally around 10% per year) will be the winner.
Bidder focus. Now it is culture of specialist toll road companies and joint
ventures with international companies. They have the
knowledge and experience in planning, operating,
maintaining, and in particular, administration and financial
managing of toll roads.
Cost and time Concessions now make specific provisions to reimburse
overruns additional capital expenditure if the scope of work is
extended by SCT. To avoid time overruns, Right Of Ways
(i.e. land for road purpose) are fully secured in advance.
Improved financial The lenders and sponsors are more cautious in structuring
structures & Currency projects. This is helped by currency stability, low inflation
stability (3.3% in December 2005) and better integration with United
States economy.
The procurement Public bidding in two stages; first is technical evaluation and
process after passing it next stage is financial evaluation. Concession
terms are limited to a maximum of 30 years (when road
construction is involved) or 20 years (for operating assets).
The concession could be extended up to the same time
period granted originally if conditions arise.
130
Aspect of Concession Corrections Post 1994
Formation of Trust Now the bidders require specifying what public grant is
and viability gap required during construction and during operational stage.
funding The Government will contribute initial grant and
subordinated amount (called Subordinate Contribution
Commitment) during the operation stage as committed at
biding stage through a trust called Fideicomiso de Inversion
en Infraestructura (FINFRA), created in a Governmental
bank (BANOBRAS).
Construction stage Generally, the concessionaire creates an Administration
mechanism Trust to conduct the construction process. Because, in
Mexico, a Trust is legally considered bankruptcy remote if
properly set up. Now debt holders act as beneficiaries of
such trust and trust also form a regulatory board, known as
the technical committee. The concessionaire will be solely
responsible of the construction of the road.
The supervision job is done by three different supervisors:
One named by the SCT, one designated by the Technical
Committee of the Trust, and one designated by the
concessionaire. This ensures transparent and corruption
proof supervision. The operation of toll collection can be
assigned to specialist operators.
Securitization of toll This is innovative refinancing mechanism now in practice.
roads The concessionaire will have the option to securitize the
flows derived from the project, and have the option of
refinancing through future securitizations subject to SCT
approval. Currently in Mexico, securitization of toll roads
has been limited to post construction projects i.e. projects
entered in operation stage. Generally, the concessionaire
creates a new trust (Issuance Trust) to administer the
resources generated from the operation of the toll road. This
Issuance Trust can issue bonds backed by financial
guarantee insurance policy, which guarantees scheduled
payments of the principal and interest.
(Source: Based on Ortiz 2006)
All these amendments are getting gradually embedded in Indian Concession models.
The Central government in India also provides grant support to the concessionaire for
NH works and under special scheme to important State Highways under price capping
regulation which is amended practice of Mexico. The Model Concession Agreement
(MCA) issued by Planning Commission of Indian Government adopts bidding criteria
similar to Mexican new approach i.e. lowest grant demanded by the bidder. The
131
provision for refinancing and Government’s partial role in three members supervisory
Committee requires preparation and evaluation of financial case before award of
concession in Mexico. The Indian concessions are yet focused on bidder’s declaration
of viability of project and hence preparation and evaluation of financial case is not
given weightage by approving authority.
3.6.6 PPP in Asia- Chinese Experience:

China is seen dominating in global literature on development of expressways and
various options of private sector participation for roads. In the period 1982-2002,
Chinese economy has grown more than five folds while GDP has grown at about
9.5% and has reduced share of agriculture sector to 15% by 2002. This is impressive
because India could manage only around 5.5% growth rate for GDP for the same
period. Reason among many is, following the Asian currency crisis in 1997, China
took advantage of the macro-economic slowdown to more than double its spending on
highways, from $13 billion in 1997 to $27 billion per annum or more during the
ensuing years (i.e. 1997-2002). This massive investment in road building is estimated
to have increased China’s GDP by a full 2 % per annum over the subsequent years.
(Harral and Sondhi 2005) India's road expenditures averaged only $ 1 to 3 billion per
annum during 1997-2002. China’s domination in toll roads among ESCAPE
countries can be seen from Table: III-10.
Table: III-10
Chinese Share in ESCAPE private toll road investments
Asian Country Private investment in toll roads(2003 prices US million $)
between 1990-2003
India 960.5
(4%)
Indonesia 933.8
(4%)
Thailand 632.2
(2.6%)
Philippines 1 309.0
(5.4%)
, Malaysii 6 214.3
(25%)
China 14 358.4
(59%)
ESCAP Countries 24 525.4
Total (100%)
(Source: World Bank Private Participation in Infrastructure (PPI) databases)
132
One limitation is felt while studying China that no update reports or detailed project
analysis (except some ADB reports for specific road) for road sector is accessible like
Western countries. However, the massive scale of investments on highways and
expressways in a short period of time & especially securitization is needed to be
understood while studying PSP in India perspective.
Ministry of Communications of China has planned National Trunk Highway System

(NTHS) of 35,500 Km. requiring $ 504 billion from 1991 to 2010 A.D. The available
revenues are estimated at $ 302 billion from road user charges and $ 29 billion from
toll collection, still leaving a financing gap of $ 173 billion or about $ 12 billion per
year. The gap is expected to be covered from better private sector participation &
some ADB assistance. (The massive investments during 1997-2002 made 77% of
NTHS completed by 2002 (Harral and Sondhi 2005). It is to be noted that most of the
private funds have come from foreign investors and little from the domestic private
sector however private funds totaling in last ten years are less than 10% of total flow.
Recently China’s financing model(Zhang 2005) for construction of new expressways
has been found shifted from largely government-invested highway development to a
mixture of central government financing through bonds and taxes (15 percent),
provincial and local government funding (35 percent), domestic bank loans (40
percent), funding from international financial institutions (5 percent), and private
investments (5 percent). Collection of tolls is the core revenue for operating and
maintenance costs and repayment of loans. Thus the emphasis is more on bank
finance without taking much recourse of PPP.
China has reportedly used mainly following methods under PSP in road sector (Ojiro
:2003).
1. Co-Operative Joint Venture Schemes: There is no debt servicing and only non
government equity participation (like a Joint venture) and hence it costs high to the
project. The foreign investor is paid some higher returns from profit till he recovers
his investments for their better involvement. Since equity holders expect higher
returns, the current expected rate of return on cooperative joint venture equity for road
projects in China is about 18 per cent.
133
2. Securitization: In this method, equity shares of 20 to 40 % are sold to the
shareholders through initial public offer. This is low cost financing but takes lots of
time in reaching this stage. Because the road company first shall reach to operation
stage encountering all the risks in the completion of construction & then fulfill stock
exchange stipulations like in the Shenzhen and Shanghai stock exchanges, companies
must have three profitable years of operation before they can be listed. However this
mode is well adopted in China and 15 Chinese expressway companies and
infrastructure developers have been listed on the stock exchanges in Hong Kong,
China; Shanghai and Shenzhen. The route of securitization is favourite in China and it
is supported by creating a new share limited company with the equity participation of
State bodies i.e. Provincial Communications Department (PCD). It requires a serious
legal process before Corporatization because after this, PCD loses considerable
control over public assets.
3. Revenue Bond Financing: This is somewhat unusual but adopted in case of

Zhuhai Highway Company Limited wherein rated notes backed by a pledge of an
entity’s cash flow sources are sold in the market. In August 1996, Zhuhai
Municipality in Guangdong Province executed an entity-level revenue bond financing
& raised $ 200 million from investors in the United States of America. It costs
moderately but requires lengthy procedure for approvals.
4. BOT Structure: This mechanism is adopted for some cases of power generation
industries but rare for roads. There are too many risks seems assigned to the investors
and since China initially asked for 100% foreign investments in BOT contract,
response was low, considering the fact that income was to come in local currency.
Second reason being, low volume of traffic. Ojiro (2003) observed that until traffic
reaches 20,000 to 30,000 vehicles per day, it is hard to justify outside investment.
China has not emphasized for private investment through BOT.
The latest up dates (China Daily 2006) of Chinese highways points out over helming
success of their programme. In 1988, China did not have an inch of expressway but
the length of expressways in China was 41,000 kilometers at the end of 2005, the
world's second longest only after the United States. About 24,000 kilometers were
added in 2001-05, or 4,800 kilometers per year. Also, in 2010 the total length of
expressways is expected to be around 65,000 kilometers. The United States had some
134
90,000 kilometers of expressways in 2005. The Chinese ministry declares that the
plan is to increase the total length of expressways to at least 85,000 kilometers by
2020 since it helps in pushing economy up. During the period, some 2 trillion Yuan
(US$241.9 billion) will be raised for road development from overseas and private
investors.
Table: HI-11
Chinese Expressway Constructions
Fiscal Year Total Length of Expressway Total Length of Road
(km) (km)
2020 85,000 Not found
(Long-term Plan)
2010 65,000 2,300,000
(Estimation)
2005 41,000 1,920,000
2004 34,288 1,870,661
2003 29,745 1,809,828
2002 25,130 1,765,222
2001 19,437 1,698,012
2000 16,314 1,402,698
1999 11,605 1,351,691
1998 8,733 1,278,474
1997 4,771 1,226,405
(Source: Mitsubishi Research Institute Inc. 2006)
Thus China is mostly relying on public funds during construction of superior roads
and put it to tolling. The State body namely PCD plays a major role in financing of
construction. After stabilization of cashflow, the cashflow is offered to securitization
and thus the project revenue gets linkage to market which helps in sharing various
risks also.
3.7 CONCLUSIONS:
As noted in this chapter, traditionally like many other nations, Indian Government has
single handed attempted to achieve efficient use of public money mainly through
inviting competitive bids for lowest price under strict public administration. Now
Government is attempting to harness efficiency and economy through private sector
participation (PSP) at varying scale for road projects. The most aspired variant of PSP
is Public Private Partnership (PPP) wherein accepting the diminishing capacity of
Government to invest in roads to match with sectoral needs, private sector is invited
135
to invest in public assets for fixed term for profits. Here, the risk and return are shared
by private sector (financial returns) with Government (economic returns) for agreed
tenure and asset actually remains under purview of Sovereign unlike absolute
privatization. This is made possible through awarding concession to private firm to
build and operate facility and then transfer free of cost to the Government body (BOT
agreement). The Eleventh Plan Working Group expects such PPP projects to be a
major source of investment in National and State Highways in next five years. The
international experience suggests that commercial approach embedded under PPP
approach restricts its application to superior roads which are generally 10% to 20% of
total road network of any country. Worldover, the PPP approach has yet not generated
much enthusiasm and specifically Europe (the main promoter of awarding concession
of public utility to private sector) is found exercising many innovations in public
administered contracts of roadwork under PSP. Regarding concessions for
maintaining the roads, Europe is found applying performance based approach and
many European countries are found awarding concessions preferably to Public bodies.
In Europe, often public bodies are found managing long term debts from markets to
cater to long gestation period of upfront investment needed for road projects declared
under some national level programme. In fact many countries worldover have applied
their public agencies under some ambitious road development programme but PPP
under BOT/BTO/DBFO contract forms have not really emerged as a panacea to meet
the investment needs. However, Mexican experience for massive construction of toll
roads has noteworthy relevance with ongoing NHDP in India. The conclusions from
international experience are discussed as below.
1. Under PSP, Government is assigning wider role to private sector including

financing of project cost which is termed as PPP. Due to PSP, role of
Government bodies handling road sector is getting thinner as it is basically
outsourcing some or all of the functions of Government. The PPP is subset of
PSP and it is very different paradigm of delivery system. Under PPP, it
requires handing over the public assets to the private investors for many years
during and after construction in terms of award of concession. The operation
of concession is different than regular civil engineering job. Here, the private
sector has to take care of optimum design, cost control and timely completion
of project and most importantly traffic adequacy (demand side) for
136
commercial success of project. Due to financial convenience of Government,
PPP is heavily emphasized but its commercial requirements renders it limited
to commercially important routes. Hence, other forms of PPP which need not
involve private investment for long term shall remain useful for development
of sector.
2. Looking to the diminishing financial capacity of Government bodies,
worldover the importance of PPP route is evident for inviting private
investment in this sector. But PPP route involves transfer of asset to private
investor whereby the public interest for economic development is served by
allowing private interest to earn from users of this public asset. Here, many
countries differ and hence all countries do not adopt BOOT/BOT type of
projects, rather they rely on public administration of projects by setting up
such public toll road companies. However the argument for efficiency and
innovations inspire many countries to opt for private toll road companies
through PPP route. Under any case, the viability concern of such toll road
companies requires regulations. The international experience suggests that
such regulations are aimed at protecting viability of such projects at minimum
cost to Government. But famous economist Alfred Marshall had stressed on
price or the quality of the services , or both, rather than on the traditional
criterion of minimum cost to Government.
operate public utilities and it has imparted many innovations in other than PPP
predetermined civil work, focusing on performance standards, the long term
It is like zeal to allow contractors to work out better solutions than traditional
State provisions and achieving reduction in operating cost of Government
body. The international experience suggests thin structure of Government
body looking to their reduced role. But above suggested innovations require
considerable expertise to draft the specifications wisely so that PSP does not
137
turn out to be opportunistic event for contractors. As noted in this Chapter, US
is said far lagging in adopting such innovations. India is also away from such
innovations but outsourcing of design, bid preparation, quality related aspects
and supervision are allowed atleast for NH works. The above said innovations
are likely to be absorbed in Indian practice due to more and more international
consultants getting involved in big projects on NH and SH.
options and it is well managed by UK The public investment in UK is any
way routed through outsourcing based PSP.
utilities. These are indicative of design of rigid and incomplete agreements.
The most striking part of renegotiations and also award of concessions seem to
be concern for commercial viability of private investments made in public
PPP format being used by NHAI. But apathy for reliable traffic count and
138
features like Administration Trust for proper accounting of construction
and maintenance) are the strongholds of new approach to toll roads in Mexico.
This type of financial discipline is recognized by investment rating companies
by awarding AAA (i.e. world class) ratings to such projects. The refinancing
of such projects during operation stage is practiced by private players which
breaks lumpiness of such investments.
tolling operations. The major aspect is, instead of BOT type ofPPP project,
State supports major investment that is recovered through proceeds of initial
public offer or securitization. The public support to investment through stock
market is good concept to secure public acceptance of toll operations.
Having discussed the international experience with reference to PPP and design of
concession, the next Chapter focuses on the development in India with reference to
development of highways (National Highways in particular) and road sector.
*
Endnotes:
1. Factor of Safety is ratio of what is provided in design to what is required as
per known design parameters.
2. Gathered from www.kpmg.com.hk accessed on date 15-4-05.
3. Gathered from website of Wikipedia: http://www.answers.com accessed on date
30-4-05.
4. Sporadic example of concession awarded to Government of Gujarat (GOG) by
Government of India (GOI) in 1999-2000 for four lanning of NH between
Ahmedabad- Rajkot is worth mentioning. GOG managed loan from HUDCO
and built this stretch of NH and presently, they are performing debt servicing
from project cashflow.
5. This data base is available online at http://www.ppi.worldbank.org
139
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144
CHAPTER-IV
DEVELOPMENT OF NATIONAL HIGHWAYS IN INDIA:

AGENCIES AND PROGRAMME
4.1 INTRODUCTION
4.2 PRESENT ROAD NETWORK IN INDIA
4.3 NATIONAL HIGHWAYS IN INDIA
4.4 QUALITATIVE ASPECT OF INDIAN NATIONAL HIGHWAYS
4.5 GENESIS OF NATIONAL HIGHWAYS DEVELOPMENT PROJECT

(NHDP)
4.5.1 Need Assessment For Investment In NH Segment
4.5.2 Fundamental Changes in Legal Framework
4.5.3 Recommendations of Task Force on Infrastructure (1998) for

NHDP
4.6 DEDICATED CESS FUNDS FOR NHDP
4.7 IMPLEMENTATION & FINANCING OF NHDP
4.7.1 Expansion of NHDP Regardless Of Slow Progress
4.7.2 Revised Financial Assumption For NHDP and Adoption of BOT

Route
4.7.3 Problems in Actual Implementation of NHDP
4.8 TWIN SUPPLIERS OF NH DEVELOPMENT & THEIR

CONVERGENCE
4.8.1 Implementation of NH Works Through State PWDs
145
4.8.2 Plight OfNH Vested in State PWD By MOSRT&H
4.8.3 NHAI Way of Executing Construction Works (Other Than PPP)
4.8.4 Performance of Changed Agency Preferred By NHAI
4.8.5 Implementation of PPP Projects BY Both Agencies
4.9 USE OF MODEL CONCESSION AGREEMENTS FOR PPP IN NH

SEGMENT AND ISSUES
4.10 APPROVAL OF PPP PROJECTS BY PUBLIC PRIVATE

PARTNERSHIP APPRAISAL COMMITTEE
4.11 CONCLUSIONS
146
CHAPTER-IV
DEVELOPMENT OF NATIONAL HIGHWAYS IN INDIA:

AGENCIES AND PROGRAMME
4.1 INTRODUCTION:
The International experience of private sector participation referred in previous

chapter has not been found much depending upon private funding of the project cost
on long term basis (PPP route). The sector of commercially important roads
(expressways, motorways) is found using PPP route and the percentage of tolling of
this category of roads is found on average little less than 40% ( computed for leading
11 European nations)mainly through public concessionaire companies. The France
being oldest practitioner of concessions has preferred public form of concessionaire
even after selling off its stake in three major public concessionaire companies in 2007.
Portugal’s toll road network run by its nationalized concessionaire BRISA lost
acceptance due to failure of BRISA to construct more roads matching with growing
needs and in want of free alternative roads that was accepted norm of nation. The
Spain was benefited by attracting foreign investors in the road sector backed by
assured returns on PPP, But Spain’s decision to offer concession on individual
stretches could not withstand profitability problems in long term. Like Portugal, Spain
also faced circumstances to revert back to public financing of projects for some period
when private sector did not respond to growing needs adequately. The hasty Mexican
toll road programme with private sector funds met with unfortunate outcome and cost
of PPP was heavily paid by Government.
Thus, many Governments have attempted massive road development for superior
roads under PPP route or under active private sector participation but public financed
route. In practice there is no straightforward answer for format of such programmes.
The role of highway agencies world over has undergone structural changes and users
have seen road sector getting more ring fenced for its expenditure and revenues.
India has also taken up an ambitious programme for construction of superior roads
from 1999 after many deliberations for almost a decade. India had options like-model
of public finance based Interstate highway project of US, public financed based but
outsourcing management based UK model, publicly managed concession based
147
French model, complete PPP based Mexican experience and initially public financed
and then linked to PPP route based Chinese model available to draft own programme.
India has opted for creation of specialist highway agency to implement the
outsourcing based administration (somewhat similar to Highway Agency of UK) but
looking forward for Mexican or Spain type awarding of PPP concession on cautious
piecemeal basis. The tenure of Indian programme so far is very brief and is dominated
by public funded, projects through budgetary allocations from fuel taxes and general
revenues. The scale of PPP based projects is yet to see its due share. The financing
and refinancing of highways leveraging on project revenues is not established in want
of market for such transactions. However, Indian highway agency has now access to
widespread coffers owing to direct tolling of all four lane roads (already built or
newly built) sections and permanent bridges. The users paying into such coffers in
addition to various taxes in the sector are puzzled with the development which has
just begun for providing better roads with extra cost. The transition of roads from
public goods into natural monopoly is being witnessed by users under PPP route of
development. This chapter encircles circumstance under which Indian highway (rather
National Highway) programme was framed, its status, its locus over the time and
attitude for PSP in general; PPP in particular.
4.2 PRESENT ROAD NETWORK IN INDIA:
The Indian roads have wide spread network of various hierarchy of roads connecting
ultimate settlements in remote villages to spread out market places and growth centers
in the country. The service standards in terms of road surfacing (earthen, metal or
bituminous/concrete), carriageway width (single lane to six lane) and geometries
(grade separation, access control, junction designs, speed limits, horizontal/vertical
alignments) vary across these hierarchy and hence varies the throughput volume. The
planning of overall road network in India for its density and connectivity norms is
governed by various 20 year road development plans framed by Indian Roads
Congress (IRC).
The present status of Indian road network is as below1.
14S
Table: TV-1
Present Road network In India
Indian Road Network As On June 2007

Expressways 200km (0.006%)
National Highways 66590km (2.00%)
State Highways 131899km (4.00%)
Major and other District Roads 467763km(14.00%)
Rural Roads 2650000km (80.00%)
Total of Indian road network 33 Lakhs Kms(Approx) (100%)
(Source: National Highway Authority ofIndia (NHAI) offices)
The above categories are broadly indicative of width of carriageway like- rural roads
are typically single lane (3.75 meter) or lesser width roads and significant length is yet
to be all weather roads; major and other district roads are intermediate lane (5.5 meter
or lesser width) but generally bituminous roads; State Highways are two lane(7.0
meter or lesser and in rare cases four lane (7.0 meter each on both sides of central
verge) and are typically bituminous roads; National Highways are typically atleast
two lane roads and can be six lane roads; Expressways are on prima facie superior
roads with atleast four lanes with access control and mostly six lane roads. However,
many States in India could be found having some stretches of National and State
Highways of rural roads standards and likewise.
Different agencies are responsible for development and construction of above

categories of roads. The village roads or rural roads and most of major and other
district roads are under the purview of Panchayats of State Governments and have
access to central as well State resources. State Highways are upgraded version of
district roads and are under the purview of State Governments. Recently, important
State highways are provided viability gap funding from Central Government to take
PPP route and many roads under State have been assisted under budgeted central
funds under Prime Minister Jawahar Rojgar Yojana (PMJSY). The National
Highways and Expressways are under Central Government purview (either under
Ministry of Shipping, Road Transport & Highways (MOSRT&H) but managed by
respective State PWDs like their State Highways or independently under NHAI).
Except very broad level integration of all categories of roads under 20 year road
development plans, no mechanism sees them as an integrated network for
development of regional or national economy which is envisaged in Plan Vision 2021
of Government of India (GOI2007: Working Group 11th Plan Report ).
Nevertheless, India stands at second rank as far as total road length is concerned as
given under Table: IV-2. Regarding density (i.e. measure of spread of road length in a
region) , it is also second in rank but better than US and China so as to avail better
connectivity to scattered development.
Table: IV-2
International Comparison of Road Network as in 2004 for Total Road Network
Nation Total Road Length Road Density (Km/100

(10,000 Km) Sqkm)
USA 635 65
India 332 112
Brazil 198 24
China 186 19
Japan 115 305
Australia 91 13
Canada 90 9
(Source: Zhang 2005)
As far as commercial aspect of road development is concerned, it is the NH and

Expressways (Expressways are subsets of NH) and to certain extent State Highways
(those stretches carrying interstate traffic) are of importance owing to quantum of
traffic being served per km and scale of investments required. As a practice any road
attracting more and more traffic will be upgraded gradually from any level up to
NH or will be brought up to NH standards. Hence it not surprising that National
Highways constitute only about 2% of the road network but carry about 40% of the
total road traffic. The declaration of any stretch as National Highway could be a
political decision too. The NH sector is institutionally supported by apex Policy
making body like Indian Roads Congress (IRC) and National Institute of Training for
Highway Engineers (NITHE) and implementation agencies like NHAI and
MOSRT&H. The Planning Commission of India also takes deep interest in
development of NH sector. The scale of investments in NH sector has been
phenomenal and guiding in terms of policy planning to all lower hierarchy of roads.
150
f;
The road construction specifications and contract formats are guided by NH standards
for all lower hierarchy of roads. Hence developments in NH sector and operations of
its agencies (MOSRT&H and NHAI) will be important to study in the road sector.
4.3 NATIONAL HIGHWAYS IN INDIA:
In terms of list 1 of the Seventh Schedule of the Constitution, the Government of India
is responsible for the National Highways.
Table: IV-3
NH Stock Additions in India
Period NH Length added Total NH length
in Kins in Kins.
As on 01.04.1947 00 21440
Pre First Plan (1947-1951) 815 22255
First Plan (1951-1956) 00 22255
Second Plan (1956-1961) 1514 23769
Third Plan (1961-1966) 179 23948
Interregnum Period (1966-1969) 52 24000
Fourth Plan (1969-1974) 4819 28819
Fifth Plan (1974-1978) 158 28977
Sixth Plan (1980-1985) 2687 31710
Seventh Plan (1985-1990) 1902 33612
Eight Plan (1992-1997) 609 34298
Ninth Plan (1997-2002) 23814 58112
Tenth Plan (2002-2006) 9008 66590*
* 530 km length of National Highways of Madhya Pradesh has been de-notified.

(Source: GOl 2007: Working Group l Ith Plan Report),
Even before independence, with effect from April 1, 1947, under an agreement with the then
existing provinces, the Government of India provisionally accepted entire financial liability
for the construction, development and maintenance of certain highways in the provinces
which were considered suitable for inclusion in a system of National Highways (NH).
National Highways Act, 1956 which came into force from April 15, 1957, declared certain
highways as National Highways and vested all National Highways in the Central
Government. The NH Act also empowered the Central Government to declare any other
highway as National Highway or omit certain highways from the list of National Highways.
The Five year plan wise additions in stock of NH are available as below. These additions are
basically upgradation of State Highways on the basis of national importance and are coupled
with change in land ownership. More over, the state is divested of financial obligation for
further maintenance and development. It is worth to note that major NH stock increment was
very recently in the Ninth plan & then in Tenth plan period. In these plan periods, the NH
stock has doubled. The declaration of additional stretches as NH is not supposed to increase
quantum of central grants for maintenance for the NH sector owing to paucity of funds.
4.4 QUALITATIVE ASPECT OF INDIAN NATIONAL HIGHWAYS:
Clarifying for above data in Table- IV-1, the label “National Highway” is not meant
for full fledge roadway in India because even by 2006-2007, India has around one
third of NH stock bearing only 3.75 Meter wide carriageway which is as good as
village roads. A break up of NH carriageway is as below:
Table: IV-4
Qualitative Aspect of NH Stock in India
Existing Width of Category For That Category NH length
Single lane 21674 km (32.55%)

Double/Intermediate Lane 36936 km (55.46%)
Four Lane/Six Lane/Eight Lane 7980 km (11.98%)

Total Length of NH 66590 km (100%)
(Note: Single/One lane is 3.75 meter wide which is just sufficient to carry a truck at a
time)
(Source: MOSRT&H Annual Report 2006-2007)
The lack of qualitative stock is evident in international comparison also where having
merely 200 km of expressways India has no stand in comparative statistics. The Table:
IV-5 expresses this fact though internationally, India is well placed at second position
in terms of stock of road.
152
Table: IV-5
International Comparison of Expressways as in 2004 & % of Total Road Network
Nation Expressways Km Expressways As % Of Total
Network
USA 96300 1.52
China 34221 1.85
Canada 16571 1.84
Germany 11400 1.74
France 10300 1.15
Spain 9063 2.61
Mexico 6335 1.96
(Source: Zhang 2005)
The fact is, about 65% of freight and 80% passenger traffic is carried by the roads and
hence roads are very important mode of transportation. Number of vehicles has been
growing at an average pace of 10.16% per annum over the last five years (2001 -
2006).This will require quantitative as well qualitative improvement of roads and
specifically of NH. As noted before, National Highways constitute only about 2% of
the road network but carry about 40% of the total road traffic. (This is similar to U.S.
Interstate highways which accounts for only 1% of U.S. road mileage but it accounts
for 24% of all vehicle-miles.) To cater to such mammoth volume in future also, the
NH can grow either in terms of adding up lane capacity (widening) or by creation of
new links to network. The Road Development Plan: Vision 2021 formulated by the
Department of Road Transport & Highways proposes to reach a total National
Highway network of about 80,000 km by the end of the year 2021 i.e. adding further
around 14000 km of NH in next 14 years (GOI 2007: Working Group 11th Plan
Report). Indian Vision Plan 2021 also focuses on widening and improvement of
existing NH along with construction of meager 10000 km of expressways by 2021.
Vision 2021 has stressed that more effort should go in the direction of augmenting the
capacity and quality of various categories of roads rather than any large scale
quantitative expansion. At policy level it is understood that there is need to identify a
CORE NETWORK of major arterial routes covering National Highways and those
state highways/major district roads which are either already experiencing high
volumes of traffic or have such potential in the light of industrial and other growth
153
strategies by both the public and the private sector. Hence, each State may identify a
CORE NETWORK considering the actual/expected flows of goods and passengers
encompassing National Highways, state highways and selected major district roads
which carry bulk of the road traffic and a Core Investment Programme undertaken for
development of the identified core network. Thus Vision 2021 seems suggesting
future development on corridor development basis integrating various important
categories of roads (except rural roads) without adding much into total stock of road
network.
4.5 GENESIS OF NATIONAL HIGHWAYS DEVELOPMENT PROJECT

(NHDP):
The deficiency in roads sector in general and NH in particular was in view since early
1990s and there was concurrent thrust for development of infrastructure including
roads in India. This was the period when infrastructure sectors were opened for
private investment as per new industrial policy declared on July 1991. There were
various need assessments for requirements of investments in roads. All of them
basically meant huge unprecedented funding requirement for improvement , of roads
including NH and hence beyond the budgetary capacity of governments.
4.5.1 Need Assessment For Investment In NH Segment:
A) The economic survey of 92-93 mentions need for improvement of

infrastructure capacity by at least 8% to meet targeted growth in national
output by 5 to 6 %. This survey estimated that: about 12% of the total NH
needed widening from single to double lane; about 56% of the total 2 lane
NH needed strengthening; 44% of the NH were expected to carry more than
15000 PCU (Passenger Car Unit, it is used to explain traffic carrying capacity
of a road on the basis of PCU= 1 for car & equivalent) per day by 1995 and
hence normatively needed to be four lanned; some 3% of total NH might carry
more than 40000 PCU per day and thus needed to be converted in to
expressways. The Ministry had estimated cost of above improvements at Rs.
41390 crores (at 1991 prices). However, Planning Commission had approved
an outlay of Rs. 2600 crores only in Eight plan (1992-97) and, total
expenditure (Centre and States) in the Eighth Plan period was just around Rs.
13,000 crores.
154
B) Expert group headed by Rakesh Mohan2 (1994) reported that the economic
losses due to poor roads were estimated @ Rs. 20,000 to 30,000 crores per
year and cost of avoiding these losses were estimated @ Rs. 120,000 crores in
terms of improving/building/maintaining network of National & State
highways. It was estimated to provide Rs. 32,000 crores in 1996-2001 and
Rs.63,000 crores during 2001-2006 for construction of NH, SH and
Expressways. More over for these two periods, provision for maintenance
required was estimated Rs. 9000 crores and 11,500 crores respectively. The
Rakesh Mohan committee thus estimated a need for Rs. 95,000 crores for
National and State Highways over 1996-2006.
C) According to a study carried out by the sub-group for the 9th Five Year Plan on
the road sector, a sum of Rs.74500 crores (at the 1996 price level) would be
needed to address the deficiencies of the existing National Highway network(
This estimate was revised at Rs. 1,65,000 crores in Tenth Plan document).
The main focus of the road development programme in the Ninth Plan (1992-
97) was on strengthening and improving the crucial sections of the highway
network through phased removal of deficiencies and multi-lanning of high
density corridors. This five year plan talked about a well defined plan taking a
perspective of 15-20 years that would help to address the important issue of
capacity constraint being experienced in roads sector (Economic Survey 1998-
99). This was the first plan which talked about a long term commitment
towards removing deficiencies in the road sector and NH in particular.
The evident need to invest heavily atleast in NH segment required some long term
planning of investments. This was required under change in delivery system through
autonomous agency with necessary legal backup.
4.5.2 Fundamental Changes in Legal Framework:
A) A major land mark was achieved by enacting up of National Highways

Authority of India (NHAI) Act, 1988 which provides for the constitution of an
Authority for the development, maintenance and management of National
Highways and for matters connected therewith or incidental thereto. Hence
during Eighth Plan itself, NHAI came into existence with effect from June 15,
1989 but it was operationalised only in February 1995 i.e. in the Ninth Plan.
155
The Authority was set up for a gradual assumption of direct responsibility for
the development and maintenance of National Highways. The NHAI was
constituted on project implementation unit basis rendering significant decision
taking powers to limited officials working at project level.
B) Another land mark was amendment of 1995 to National Highways Act-1956
by insertion of new sections 8A-“POWER OF CENTRAL GOVERNMENT
TO ENTER INTO AGREEMENTS FOR DEVELOPMENT AND
MAINTENANCE OF NATIONAL HIGHWAYS": Section 8A:
(1) Notwithstanding anything contained in this Act, the Central Government may
enter into an agreement with any person in relation to the development and
maintenance of the whole or any part of a National Highway.
(2) Notwithstanding anything contained in section 7, the person referred to in sub
section (1) is entitled to collect and retain fees at such rate, for services or
benefits rendered by him as the Central government may, by notification in the
official Gazette, specify having regard to the expenditure involved in building,
maintenance, management and operation of the whole or part of such National
Highway, interest on the capital invested, reasonable return, the volume of
traffic and the period of such agreement.
(3) A person referred to in sub-section (1) shall have powers to regulate and
control the traffic in accordance with the provisions contained in Chapter VIII
of the Motor Vehicles Act, 1988 (59 of 1988.) on the National Highway
forming subject matter of such agreement, for proper management thereof.
So far development and maintenance of the whole or any part of a National Highway
was under the purview of government body (Central or authorized local at State or
below level). Now the NH segment was opened up to private sector participation
beyond traditional employment for cash contract works. This was the foundation to
emerge out of budgetary constraints in implementing a long term development
programme and was immediately applied by MOSRT&H itself prior to NHAI. This
Amendment (1995) bill was passed by Lok Sabha on 31-5-1995, three projects for
private sector participation on BOT basis were taken up by MOSRT&H itself: first
contract was signed on 9-12-1995 for Thane - Bhivandi (Maharashtra) bypass at
estimated project cost of Rs. 103 crores ; second was signed on July 1996 for Udepur
(Rajasthan) at estimated project cost of Rs. 24 crores and ;third contract was signed
on 19-9-1996 for one ROB at Chalthan (Gujarat) at estimated project cost of Rs. 10
156
crores and all were awarded on BOT basis.(Economic Survey 1998-99) For NHAI,
Durg Bypass in Madhya Pradesh at estimated project cost of Rs.68 crores was the
first BOT project for private sector participation and the contract was signed on date
5.11.1997. Thus despite special purpose vehicle (i.e, NHAI) created by MOSRT&H,
BOT works were first taken up by Ministry itself and NHAI took more than two
years to sign first BOT project. Though NHAI was -to assume all NH stretches,
substantial stretches have remained under Ministry so far and up to 2005, many BOT
projects are awarded by Ministry on NH stretches exhibiting some curbs in expanding
NHAI to its fullest size.
It is necessary to note that India has no separate law3 for signing a BOT type of
contract with private investors but there is a general Indian Contract Law (1852) that
enables to enter into BOT type of contracts for long term financial involvement of
private sector. The NHAI Act for that matter serves institutional requirements for
wading through PPP route. But the overall back ground set up for development of NH
is not really aggressive for private investment under PPP.
C) To create acceptance to the concept of tolling under BOT but more from
considerations of creating stable cash-inflow for the road sector, the
Government decided to toll all four lane NH sections though built through
budgetary allocations by enacting National Highways (Rate of Fee) Rules,
1997. These Rules specified maximum toll rates for various vehicles as on
1997 subject to revision as per increase in Wholesale Price Index. This was
most crucial political decision confronting willingness to pay aspect on
hitherto free NH roads. The issue has emerged like toll collected from a State
having more four lane stretches and permanent bridges may not be allotted all
money back in the State in want of maintaining poor stretches of other States.
If a State does not develop four lanning, it can remain permanent recipient of
funds collected from other stretches. The Table: IV-6 illustrates the State wise
disparities in development of NH. As per this table, Gujarat stands at 10th
highest rank in terms of total NH passing through State and that fa merely 5%
of total NH of India. But it has 916 km tollable NH and hence it shares 12%
of tollable income from total 7698 km four lane NH of India. Of course, actual
toll collection will depend upon traffic volume and toll realized in respective
States.
157
Table: IV-6
Details of Four Lane and above National Highways in Various States of India (2006)
SR. States Total N.H. Four Lane % of total % share % share in
No. passing and above N.H. length in total total
through N.H. four lanned NH length tollable
state Length and above 66590 km length 7698
(km) km
1 Andhra 4472 1229 27% 6.72 15.97
Pradesh
2 Assam 2836 19 0.7% 4.26 0.25
3 Arunachal 392 0.0 0%
Pradesh 0.59 0.00
4 Bihar 3642 221 6% 5.47 2.87
5 Chandigarh 24 15 63% 0.04 0.19
6 Chhattisgarh 2184 36 2% 3.28 0.47
7 Delhi 72 72 100% 0.11 0.94
8 Goa 269 26 10% 0.40 0.34
9 Gujarat 3245 916 28% 4.87 11.90
10 Haryana 1512 406 27% 2.27 5.27
11 Himachal 1208 0.0 0%
Pradesh 1.81 0.00
12 Jammu & 1245 0.0 0%
Kashmir 1.87 0.00
13 Jharkhand 1805 175 10% 2.71 2.27
14 Karnataka 3843 546 14% 5.77 7.09
15 Kerala 1440 54 4% 2.16 0.70
16 Madhya 4670 125 3%
Pradesh 7.01 1.62
17 Maharashtra 4176 592 14% 6.27 7.69
18 Manipur 959 14 2% 1.44 0.18
19 Meghalaya 810 0.0 0% 1.22 0.00
20 Mizoram 927 0.0 0% 1.39 0.00
21 Nagaland 494 0.0 0% 0.74 0.00
22 Orissa 3704 330 9% 5.56 4.29
23 Pondichery 53 0.0 0% 0.08 0.00
24 Punjab 1557 268 17% 2.34 3.48
25 Rajasthan 5585 866 16% 8.39 11.25
26 Sikkim 62 0.0 0% 0.09 0.00
.27 Tamil Nadu 4462 514 12% 6.70 6.68
28 Tripura 400 0.0 0% 0.60 0.00
29 Uttaranchal 1991 7 0.4% 2.99 0.09
30 Uttar 5874 829 14%
Pradesh 8.82 10.77
31 West Bengal 2377 438 18% 3.57 5.69
32 Andaman 300 0.0 0%
Nicobar 0.45 0.00
Total 66590 KM 7698 KM 12% 100.00 100.00
(Source: Derived from data available under Lok Sabha Unstarred Question Nov 2006- No
1255 & MOSRT&H Offices)
158
4.5.3 Recommendations of Task Force on Infrastructure (1998) for NHDP:
In continuation of surge for a big investment program for development of NH

network in India, Government decided to constitute a Task Force on Infrastructure
with the aim of attracting investments for specific projects of national and regional
importance, and ensuring their timely completion. To begin with the Task Force was
to deal with projects announced by the Prime Minister on October 21, 1998, viz. Six
lane expressway of 7,000 km Length, having North-South and East-West corridors,
four-lanning of National Highways, and five world-class international airports. The
Task Force was headed by Deputy Chairman, Planning Commission ( then Shri
Jaswant Singh) and was represented by members from Prime Minister Office,
MOSRT&H, Infrastructure Development Finance Corporation (IDFC) , Ministry of
Aviation, Mahindra-Ford group. This Task Force discussed two options and finally
recommended a mix of them terming it "National Highway Development Project
(NHDP)."
Proposal:!
With an aim to four lane all length of the four corridors (at that time about 1200 km
was already four laned out of total 6000 km) forming the "Golden Quadrilateral"
(GQ), cost of widening (the balance) 4,800 km of the Golden Quadrilateral from 2-
lanes to 4-lanes was estimated at about Rs. 19,200 crores, assuming a cost of about
Rs. 4 crores per km (NHAI estimate, assuming that no significant land acquisition is
involved).The GQ consisted of 15% of NH network that time.
Proposals
The development of a new Expressway system along the North-South and East-West
axes, estimated at about 7,000 km; The cost of developing an Expressway system of
7,000 km along the North-South and East-West axes was estimated at Rs.84,000
crores, assuming a cost of about Rs, 12 crores per km.
Alternative Proposal:
This proposal envisaged development of the "Golden Quadrilateral" as described

above, plus the 4-laning of additional identified "spurs" from the Quadrilateral to
cover other important sections and States within and outside the Quadrilateral.
159
Table: IV-7
Proposed Cost of Three Proposals (NHAI Estimates 1998 Basis)
Proposal Details Cost per Length, km Total

km, Rs. Cost, Rs.
crores crores
1. Widening of GQ from 2- 4.0 4,800 19,200
lane to 4-lane
2. Development of a new 6- 12.0 7,000 84,000
lane expressway on N-S &
F.-W axes
3. Widening of GQ as well as 4.0 8,900 (4800 km 35,600
4,100 km of additional GQ; 4100 km
spurs (NHDP) Spurs)
(Source: Taskforce on Infrastructure 1998)
The Task Force estimated funding requirements for NHDP proposal and possible
sources of financing as below spread over 5, 7 and 10 year time span for investments.
Keeping in view possibility of moderate availability of finances, the investment was
advised to spread over span of 10 years.
Table: IV-8
Annual Sources of Investment Funds for Funding the NHDP
(Amounts in Rs.crores)
Source Expected Annual Investment in NHDP
Financial Institutions 1,500(33.5%)
Pvt. Sector Equity 500(11%)
Insurance Sector and Provident Funds 1,500(33,5%)
Commercial banks 1,000(22%)
Total 4,500(100%) 4,500 4,500
Spreading over span 5 years 7 years 10 years
Annual Requirement 8,200 6,300 4,900
Annual Gap 3,700 1,800 400
160
Note:
1. Investment from commercial banks, insurance sector and provident funds

would mainly be in the form of Government bonds.
2. In the absence of a foreign exchange hedging mechanism, foreign equity
investment may be limited and hence not considered.
3. The balance amount of Rs. 3,700 crores per annum would have to be
mobilised from other sources including multi-lateral agencies and foreign
banks. Alternatively, if the implementation time-frame was spread out over 10
years, the dependence'on additional sources would reduce.
The above flow of funds assumed very good financial support from other than
budgetary sources for project period up to 10 years with out any restrictive
implications. As a major decision, it was expected that NHAI will be provided some
dedicated stream of funds (Table: IV-9) which shall be levered out to gamer finances
stated under Table:IV-8. Thus, Task Force assumed various levies for generating a
dedicated road development fund, called “National Highway Development Project
Fund.” This was very significant move by Task force to induce commitment of
Government on long term basis.
161
Table: IV-9
Estimate Of Annual Revenue Availability For The
National Highway Development Project Fund (NHDPF)
(Amount in Rs. crores)
Source Basis Additional % Amount % Amount
Revenue column available column available
per (3)* will for (5)* for
annum be National will be NHDPF
availed Highways availed per
for per for annum
National annum NHDPF
Highways
1 2 3 4 5 6 7
Petrol Re.l / litre 800 100 % 800 100 % 800
cess
(existing)
Diesel Re 0.5 / litre 1,830 100 % 1,830 100 % 1,830
cess
Tolls Rs. 0.4 I 520 100 % 520 100 % 520
collected PCU/KM
from
NHDP
Cess on 500 100 % 500 100 % 500
public and
private
transport
services
Additional Rs.5000/car 500 100% 550 100% 500
Excise
duty on Rs.lOOOO/co-
motor omercial
vehicles vehicle
Total 4,150 4,150 4,150
* IDFC assumption
Assumptions in estimating above revenues:
1. Funds from the Petrol cess to be introduced in 1998-99 representing additional

resources in the sector.
2. Diesel consumption was assumed at about 30 million tonnes per annum at
specific gravity 0.82. But if technological advances to replace diesel run trucks
162
by gas or alternative fuel, such assumption for consumption of diesel/petrol
will require big corrections.
3. 20% of the NHDP, i.e. about 1,780 km, was assumed to be tolled. These
sections were all assumed to be high density corridors with traffic of about
20,000 PCUs/ day.' But this assumption was underestimation of toll revenues
since Government had already declared to toll all four lane NH sections in
addition to permanent bridges by 1997 Rules.
4. Cess on public transport services would be levied on State Road Transport
Corporations (on revenues) and on private fleet operators (additional road tax/
cess), and would flow to State-level NHDP funds. In the absence of State-level
figures, a broad estimate of Rs. 500 crores per annum had been made for the
time being. Other .possible sources could be additional vehicle taxes/
registration fees.
5. Excise duty was based on assumed annual production of cars at 400,000
numbers and buses/commercial vehicles at 300,000 numbers. However, given
the present status of the automobiles sector it was considered to be possible to
levy the same only after 2 years.
6. The above annual revenue stream was assumed to grow at 5% per annum over
the next 20 years.
7. The annual revenue accretion as estimated above could support an investment
program of about Rs. 29,600 crores (assuming a discount rate of 15% per
annum over a period of 20 years, and taking into account an annual operation
and maintenance cost of 2% of the capital cost) Hence, additional revenue
mobilization of about Rs. 720 crores per annum (1998 prices) was estimated to
be required to support the minimum investment program of Rs. 35,600 crores
(1998 prices) as estimated earlier.
Hence a host of user charges were contemplated to be levied to pay off borrowings for
NHDP and for maintenance & operations of the project. The Task Force noted that
the National Highway Development Project Fund would need to be carefully
designed. In this regard, it would be important to note that users of roads and owners
of vehicles would be willing to pay into a road fund if they perceive that their
contributions would be used for improving the road network. The Task force
acknowledged that credibility of a road fond can be enhanced by:
163
1. Tight legal and administrative ring-fencing of the fund in the sense that
expenditure from the fund will only be used for roads,
ii. Having strong "user group" presence in the committee that would oversee the
use of funds.
Following points are noteworthy for undertaken study from suggestions of Task
Force.
• Task Force estimated 63% of total Rs. 4150 crores to come from fuel cess
fully dedicated for NHDP. In reality, fuel cess has been imposed on petrol &
diesel from FY 1998-99 and being raised at higher rate than estimated. But it
is not fully dedicated to NHDP as discussed in subsequent sections.
• Also, no other dedicated levies are imposed as thought out by Task Force.
• No private investment is advocated to reduce shortfalls in investments.
• Also, no user group as such is identified or established so far.
• The above estimates take share of toll revenues of 1780 km of four laned NH
sections at Rs. 520 crores (i.e.13% of total Rs. 4150 crores) only. Considering
100% tolling of 8900 km of NHDP, Rs. 2600 crores could be derived which
would have been highest among all sources. Also, the maintenance of NH
stretches will be in need of large funds for which in fact, tolls are levied on
completed four lanes. Hence, availability of toll income for new development
can vary yearly as per maintenance needs. Task Force has not emphasized this
aspect in detail.
• Hence, it can be deduced that Task Force had assumed NHDP implementation
mainly through dedicated funds more under traditional delivery system and
share of BOT type of toll projects under PPP route was not identified or
advocated for reducing requirements of dedicated funds.
4.6 DEDICATED CESS FUNDS FOR NHDP:
As noted above, it is only dedicated cess funds that were strongly in minds of Indian
planners while framing NHDP. But the cess on fuels was preexisting historically. The
Central Road Fund (CRF) was constituted in 1929 to receive proceeds from duty of
customs and excise levy on non-aviation motor spirit at 2.5 annas per gallon of taxed
motor spirit in non lapsable manner. But it was revamped in Year 2000.The Central
164
Road Fund Ordinance, 2000 was promulgated on November 1, 2000 to give statutory
effect to the creation of Central Road Fund. The bill to replace the said ordinance was
passed by the two houses of the Parliament and an assured user charges in terms of
additional cess is being levied on petrol and High Speed Diesel. An additional cess of
Re. 1 per liter was levied on petrol with effect from as early as June 2, 1998 and
similar additional duty of Rs. 1 per liter on imported and domestic High Speed Diesel
Oil was levied with effect from March 1, 1999. The revenues from these levies are to
accrue to a dedicated Central Road Fund. As a formula, 50 per cent of the cess on
High Speed Diesel Oil is to be allocated for the development of Rural Roads. The
balance of amount of 50 per cent on High Speed Diesel Oil and entire cess collected
on petrol is to be allocated for the development and maintenance of National
Highways (57.5 per cent), for construction of road over/under bridges and other safety
works at unmanned rail road crossing (12.5 Per cent) and development and
maintenance of State Roads including roads of economic importance (30 per cent).
Out of this amount, 10% i.e., 3% of the total share of the State Roads shall be kept as
reserved by the Central Government for allocation to States for implementation of
State. Road Schemes of Inter-State and economic importance to be approved by the
Central Government. The allocation to the different States from the States’ share of
Central Road Fund is now based on the consumption of petrol and diesel and
geographical area of the State concerned. Release of funds is project specific and
further instalments are released subject to the receipt of the utilisation certificates.
The fund will be non-lapsable and will be used to fund the development of the total
hierarchy of roads, right from National Highways through State Highways to Rural
Roads. This cess was made Rs. 1.50 per liter of Petrol & Diesel in 2004-05 and out of
this, Rs. 0.43 per liter of diesel and Rs. 0.86 per liter of petrol go to NHDP. The
present rate of cess is Re.2.00 per liter on both petrol and diesel. This mechanism has
remained a major source of financing of NHDP as was perceived e.g. during 2000-
2001, an amount of Rs. 2,010 crores had been allocated for development of National
Highways & out of this Rs. 1,800 crores had been given to NHAI for NHDP(Year
wise cess details given under Table:IV-17). Such dedicated funds for highways are
operational in many countries including US. The US Federal-Aid Highway Act of
1956 played a central role in financing highways in the US during the last 50 years,
including financing over 46,000 miles of the Interstate Highway System. The Federal-
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Aid Highway. Act of 1956 created the Highway Trust Fund and dedicated to the fond
all revenues from a set of excise taxes on highway fuels, vehicles, and parts, as well
as an annual fee paid by operators of large trucks.
4.7 IMPLEMENTATION & FINANCING OF NHDP:
Finally, the programme was launched by then Hon'ble Prime Minister Mr. Atal
Bihari Vajpayee on January 2, 1999. The implicit objectives of NHDP were GDP
growth, improved nation wide connectivity, national integration, and employment
generation etc. But the NHDP is evaluated more in terms of length targeted and
actually completed under various phases. Quoting inadequacy of State PWDs, the
NHAI was mandated to implement this project. For example, the Economic Survey
1997-98 reports-as on December 31, 1996 there has been an average time overrun of
18 months and an average cost escalation of 29 per cent leading to an additional
burden of Rs. 31000 crores in 189 Central Sector Projects in various fields including
roads costing Rs.100 crores and above. Hence under such a case the implementation
of NHDP through autonomous special purpose agency namely NHAI was probably
felt by planners most appropriate for Government. Hence NHAI started taking over
NH stretches from States from year 2000 onwards as per inclusion of such stretches
under any Phase of NHDP.
Initially, NHAI had been mandated to implement NHDP Phase I which was
approved by Cabinet Committee on Economic Affairs (CCEA) in December 2000 at
an estimated cost of Rs. 30,300 crores (1999 prices). It consisted of 5,846 km of
Golden Quadrilateral connecting four metropolitan cities of Delhi, Mumbai, Chennai
and Calcutta, 981 km of NS-EW corridors, 356 km of Port Connectivity and 315 km
of other National Highways, a total of 7,498 km. This was expanded by adding North-
South and East-West corridors (total 7,300 km), connecting Srinagar to
Kanyakumari and Silchar to Saurashtra respectively and Salem to Cochin under Phase
II. Now collectively NHDP was estimated to cost Rs 54,000 crores (1999 prices).
Later, NHAI was also asked to four lane port connectivity of 400 km and other
projects of 600 km at a cost of about Rs. 4,000 and thus revising cost to Rs. 58,000
crores.
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The Golden Quadrilateral part was to be completed by 2003 and North- South & East
- West corridor by 2007.
The Financing of NHDP Phase-1 &II are announced by NHAI as below.
Table: IV-10
Financial Arrangement for NHDP (Phase-1 &II) for cost at 1999 prices
Cess 20,000(35%)
World Bank/Asian Development Bank Loan Assistance 20,000(35%)
Market Borrowings 12000(20%)
Private Sector 6000(10%)
Total 58000 (100%)
(Source: www.NHAI.org accessed last on 22-8-07)
It is simple to see that even presently, NHAI does not estimate much of private funds
beyond 10% though more than 5000 km of length is still to be awarded for Phase-
I&II ( for corridors, as per NHAI online status report ending Sept 2007).
4.7.1 Expansion of NHDP Regardless Of Slow Progress:
The NHDP has been expanded as below and it has seen many delays as summarized
below. Nevertheless, under growing expectations for speedy NH development
(despite failure of NHAI to complete even GQ under Phase-I) scope of NHAI is
stretched up to Phase-VII that is up to December 2015. The declaration of NH stretch
for inclusion in NHDP has one genuine problem. Once the stretches are identified
under NHDP, though they are taken over from State, the outlay for maintenance is
neglected keeping in view future upgradations by NHAI. For example, already four
laned NH-8 between Vadodara- Bharuch- Surat was handed over to NHAI as back as
in year 2001-2002 merely for toll collection under NH Fees Rules 1997 and six
lanning was to come after seven to eight years. Meanwhile, maintenance aspect was
found pitiable by road users as also reflected under Willingness To Pay surveys
conducted for undertaken study. NHAI was either not fully equipped to maintain such
heavy traffic carrying stretches or was waiting for private concessionaire to spend
under its upcoming six lanning project of these stretches. The maintenance of NH
included in NHDP but yet to be taken over from State has similar tale and here
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MOSRT&H reduces maintenance grants in view of future NHAI works. Such thrifty
measures affect the riding quality of NH severally. Since, recent policy shift led to
declare implementation of Phase-Ill and onwards through BOT based PPP route,
declaration of new stretches under various Phases really did not mean any obligation
to the Government. There is no feasibility study to take up identified stretches of
phase III onwards under PPP route which means delays in taking up PPP projects on
such stretches. If seen otherwise, any revision of financial plan due to revised scope of
NHDP provides platform to revise cost of on going Phase-I&II. The cost of these
Phase-I&II is revised from Rs.58,000 crores to Rs. 64,639 crores as given under
Table: IV-11.
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Table: IV-11
NHDP Outline For All Phases I To VH.
NHDP Phase & Scope Length Km Approved Cost Stipulated Status
Rs. As on Date Dates
for
Completion
Phase:I 7,498 km Rs. 30,300 crores Dec2003 GQ
Four/six lane (1999 prices) Dec2004 96%completed;
5,846 km of Golden Approved on Dec2005 other inch NS-
Quadrilateral, 981 December 2000 Dec2006 EW 22%
km of NS-EW corridors, Mar 2007 completed.
356 km of Port Dec2G07 NHAI has often
Connectivity and 315 separated GQ
km of other National and clubbed
Highways remaining of
Phase:II 6,736 Rs. 34,339 crores Dec2007 Phase I &II for
Four lane NS-EW (2002 prices) Dec2009 reporting
Corridor (6,240 km) and approved by purpose.
other National Highways CCEA in
of496 km length December 2003
PhaseHII HIA = 4000 Total esti. cost Rs. IIIA=Dec HIA in progress;
High density traffic km identified 55000 2009 HIB yet to start.
corridors not included in DIB = 6000 crores(A+B) IIIB=Dec 1845 km
Phases-I & II; (ii) km identified IIIA=Mar 2005 2012 awarded on
Providing connectivity Total = 10000 IIIB=Mar 2006 Bot(Toll) and 36
of state capitals with km km awarded on
NHDP (Phases-I&H); Annuity basis.
and (iii) Connectivity of i.e. only 1881 km
centers of tourism and awarded; 266 km
places of economic 4 lanned so far.
importance. This whole
Phase III will be on
BOX.
PhaseHV IVA = 5000 Total esti. cost Rs. IVA= Dec Stretches yet to
Selected stretches km 25000 2012 be identified.
(not part of Phase I, II, IVB = 5000 crores(A+B+C+D) IVB= Dec
or HI.) to be improved to km Approval pending 2013
2-lane standards with IVC = 5000 IVA= Dec 2006 IVC= Dec
paved shoulders. km IVD= IVB= Dec 2007 2014
5000 km IVC= Dec 2008 IVD= Dec
Total 20000 IVD= Dec 2009 2015
km
Phase:V 6,500 km Approved Rs. Dec2012 Work recently
6-laning of 6,500 km of 41,210 crores, started on 148
selected stretches of which includes km and 6352 km
existing 4-lane NHs on budgetary support are yet to be
Design Build Finance & ofRs. 5,518 awarded.
169
NHDP Phase & Scope Length Km Approved Cost Stipulated Status
Rs. As on Date Dates
for
Completion
Operate (DBFO) basis. crores; balance
This includes 5,700 km Rs. 35,692 crores
of GQ and other selected is to be mobilized
stretches. through private
sector
participation.
Nov 2005
Phase: VI VIA = 500 Approved cost of VIA= Dec VIA stretches
The Govt, has approved km Rs 16,680 crores 2014 identified;
proposal for VIB = 600 km (Rs 7,680 crores VIB = Dec VIB to be
development of 1000 km as contribution of 2015 identified
of access controlled four Govt. / NHAI for
/ six lane divided utility shifting,
carriageway land acquisition
expressways on BOT etc.; remaining Rs.
basis. 9,000 crores to be
mobilized from
private sector.
$ VIA- Dec 2007
VIB=Dec 2008
Phase: VII VIIAtoVnC Estimated cost of VIIA= Dec No stretches yet
This proposed Rs 16,680 crores. 2012 identified and no
programme envisages VIIA= Dec 2006 VIIB= Dec approval of this
construction of ring VIIB= Dec 2007 2013 Phase so far.
roads, flyovers and by VIIC= Dec 2008 VIIC= Dec
passes on selected 2014
stretches on National
Highways and
improvements to city
road networks by adding
ring roads,
Total Km and estimated 51834 km Rs. 202,529 crores (total of Phase I to VI)
cost identified as (total of Phase (The estimated cost of NHDP is Rs.219,209 crores if
above(Phase-I to VII) I to VI. The estimates of Phase I to VII are added up.)
km under
Phase-Vfi yet
not known
and hence not
included)
(Source: compiled from Working Group 11" Plan Report 2007; NHAl update as on Sept 2007 on
web site and Wikipedia, thefree encyclopedia accessed through Google on date 25-7-07)
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Looking to Table: IV-11 &12, it can be seen that NHDP has remained synonymous
with GQ only since any thing apart from GQ is mostly at planning stage if minor
progress on Phase II is ignored. But the substantial completion of GQ was not easy for
NHAI though the corridor of GQ was most established one. The progress of GQ was
only just around 45% at the end of Dec 2003 (i.e. original time limit). The dead line
for completion is postponed many of times till March 200B. NHAI has effectively
four lanned NH so far at the rate of 72 km per month and as at end of Sept 2007, yet
232 km of GQ are to be completed. The situation is worst for NS-EW corridors
(placed under Phase-II) which are under green field conditions. As on end of Sept
2007, total 5727 km are yet under implementation and 822 km are yet to be awarded.
Even if all 822 km are assumed as awarded, total pending length will be 6549 km. At
the rate of450 km per year it will require almost 15 years from this point, i.e. NS-EW
corridors can not be completed before Sept 2022. This entire mean very uncertain
scenario persists for NHDP under Phase II and onwards.
Table: IV-12
Progress of Golden Quadrilateral & NS-EW of NHDP Phase-I & II
Target :5846 km GQKm NS-EW Km (Phase-I & II)
GQ &7300 km Cum. Km Yet to be Cum. Km Yet to be
corridors Completed awarded Km Completed awarded Km
As on Nov 2001 1020 1065 Not available 5886
As on 31 July 1159 136 Not available 5812
2002
As on Nov 2002 1218 136 Not available 5812
As on 31 March 2612 0.0 588 6211
2004
As on 31 Jan 2005 4480 0.0 675 5768
As on Nov 2005 5097 0.0 788 2441
As on Nov 2006 5474 0.0 853 1053
As on Feb 2007 5540 0.0 1080 908
As on Sept 2007 5614 0.0 1573 822
Avearge per 3002 km completed in 42 985 km completed in 42 months
month production months i.e. 72 km per month i.e. 24 km per month or 300 km
of 4 lannning or 900 km per year per year. (Alternatively, from
( 3/04 to 9/07) 11/05 to 9/07 @ 36 km per
month or at most 450 km per
year.)
(Source: Derivedfrom GOI Economic Surveys and NHAI online updates)
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The problems narrated by NHAI for delays are -utility shifting, termination of 5
contracts in GQ (3 funded by ADB, one each by WB and NHAI), termination of 5
contracts in NS-EW (all funded by NHAI), land acquisition, contractor’s sluggish
progress etc. Significantly, no delay is apparently attributed to financial crunch once
the projects are awarded but there are delays in awarding projects. These are all
problems any State PWD would have faced and NHAI has not made any impact on
progress of NHDP on the virtue of its Specialist stature. If details of financing of
projects are observed, NHDP Phase I is found implemented on minor share of private
sector participation and hence selected departmental way of working can be held as a
attribute for delays. Regarding Phase II, the delay is enormous at award stage itself
which is mainly due to selection of greenfield stretches. Under NHAI managed
execution, the problems are in fact compounded because NHAI is set up with
minimum Staff and designing-estimating- bidding-supervising-quality auditing etc. all
important aspects are outsourced which were earlier undertaken by State PWDs. The
site clearance and monitoring of outsourcing seems beyond the minimal size of
NHAI.
4.7.2 Revised Financial Assumption For NHDP And Adoption Of BOT Route:
The expansion of NHDP is like an attempt to paint rosy picture for future of National
Highways through all of a sudden leaning on BOT approach. The BOT approach is
expected to make faster delivery of product that was missed under outsourcing based
delivery system under Phase-I&II. The expansion of NHDP is envisaged at the
approved cost of Rs. 203,155 crores (up to Phase-VI but does not include Phase IV &
VII in want of identification of stretches at approval stage of this cost; this is recent
revision to earlier total estimate of Rs. 202,529 crores of Phase I to VI) based on
financial support at 42% from cess &market borrowings, 7.6% from external
assistance and 50 % through BOT route. The revised financial plan is given under
Table: IV-13. If the phase III onwards financial assumptions of GOI are traced in the
Table:. IV-13, the total project cost of these three Phase (Phase III, V & VI) is
approved for Rs. 138516 crores and 31.5% of it is to be through cess and market
borrowings whereas remaining 68.5% is assumed to be covered by private investment
under BOT contracts. However, the BOT projects are not really to be awarded as
assumed under above plan declared by MOSRT&H if estimates prepared by Working
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Group of 11th Plan are viewed. The Working Group has acknowledged significant
funds from cess and market borrowing to be used for remaining stretches under
phase-II and hence, BOT projects are estimated to cover at the most 50% of total
funding requirements if really the projects are awarded time to time.
Table: IV-13
NHDP Financing Revised Assumptions
Phase Funding Arrangement Approved Cost (Rs. in crores)
NHDP-I Cess and Market 18,846 (US$ 4.18b) 30300 [1999
borrowings Prices] (US$
External Assistance 7,862 (US$ 1.74 b) 6.73b)
BOT/SPV 3,592 (US$ 0.79 b)
NHDP-II Cess and Market 23,420 (US$ 5.20 b) 34,339[2002
borrowings Prices] (US$
BOT 3,310 (US$ 0.73 b)
NHDP - III Cess and Market 30,497 (US$ 6.78 b) 80,626(US$
borrowings 17.92b)
Share of Private Sector 50,129 (US$ 11.14 [1.1.2006
(BOT Projects) b) Prices]
NHDP- V Cess and Market 5,519 (US$ 1.23 b) 41,210(US$
borrowings 9.16b)
Share of Private Sector 35,691 (US$ 7.93 b)
(BOT Projects)
NHDP - VI Cess and Market 7,680 (US$ 1.71 b) 16,680
borrowings [1.1.2006
Share of Private Sector 9,000 (US$ 2.00 b) prices] (US$
(BOT Projects) 3.71b)
Total Cess and Market 85,962 (US$ 19.10 b) 203,155
borrowings (US$
Share of Private Sector 101,722 (US$ 22.60 b)
(BOT Projects)
Note:- US$ = Rs.45
(Source: Based on Bam 2007)
The requirement of funds during the 11th Plan (2007-2012) for implementation of
NHDP has been worked out by the Working Group. The total amount required during
this period is about Rs. 1,73,501 crores. The projected availability of fund from
various sources during Eleventh Plan period ( 2007-1012) are assumed by the
Working Group as below:
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Table: IV-14
Financing Assumption of NHDP during Eleventh Plan Period (2007-12)
S. No. Funding Source Amount (Rs. Crores)
1 Cess 36,589 (21%)

2 External Assistance 4,454 (2.50%)
3 Borrowings by NHAI 41,615 (24%)
4 Surplus from the user fee 3,108 (2%)
5 Share of private sector 87,735 (50.50%)
TOTAL 1,73,501 (100%)
(Source: GOI2007: Working Group 11" Plan Report )
The problems with NHDP can be viewed in terms of problems with the way NHAI
was set up and asked to perform and also the delivery system assigned to NHAI to
meet with targets. Looking to the expansion of NHDP in fact, NHAI has just
concentrated on Phase -I & II that is 32% of total Rs. 203,155 crores programme for
its first eight years out of its total stretched tenure of 16 years (i.e. January 1999 to
December 2015). Now it aspires to achieve remaining 68% of unprecedented scale of
investment in NH segment within next eight years that too mostly under changed
delivery system of PPP. Since NHAI is permitting up to 40% of project cost as a grant
to private concessionaire of PPP project, the cess, borrowing and surplus from user
fee (after deducting for operation and maintenance ) etc. are going to be equally
relevant for sustainability of NHDP financing even if all the projects from Phase-111
are possibly awarded on BOT basis. In the further sections, NHDP implementation
problems with NHAI and converging role of NHAI with State PWD is analyzed in the
NH sector.
4.7.3 Problems in Actual Implementation of NHDP:
The Planning Commission Core Group has brought to the notice that the policy
framework for toll-based BOT projects was originally approved by the Cabinet in
1997(GOI Report 2006). Subsequently, in-principle approval of NHDP Phase I & II
was given by the Cabinet on April 5, 2000 followed by CCEA approval of NHDP-I
on December 12, 2000. Under the said approval of NHDP, contracts were to be
awarded to the extent possible on BOT (Toll)/ BOT (Annuity) model. However, 5,810
km under NHDP-I have been four-laned through item rate construction contracts (i.e.
174
cash contracts) that were funded entirely from cess, borrowings from market and
multilateral agencies like ADB. Basically borrowings/loans were secured by
Government and ail funds were directed to NHAI in terms of budgetary allocations.
Some 476 km were taken up under the BOT (Annuity) mode that would require
deferred payments over 15 years and hence it was suited to budgetary allocations. The
total length of four-lanning through toll based BOT mode was merely 454 km. The
departmental way of execution of Phase-I was not impressive and hence under next
subsections, attempts are made to sort out problems with set up of NHAI and
financing of NHDP.
4.73.1 Problems with Set up of NHAI Under NHAI Act, 1988:
National Highways Authority of India Act, 1988 provides for the constitution of an
Authority for the development, maintenance and management of National Highways
and for matters connected therewith or incidental thereto. Under the purview of Act,
NHAI has been set up as below which misses many issues as observed hereunder:
1) Organizational Set Up As Public Servants: The Authority has a board

comprising of a Chairman; not more than five frill-time members; and not more than
four part-time members, to be appointed by the Central Government by notification in
the Official Gazette. Hence, NHAI carries lean and manager-oriented organizational
set up. NHAI obtains staff primarily from two sources: (a) by open recruitment and
(b) by borrowing from various departments and undertakings of Government of India
and various State Governments. Also, Employees of the Authority are declared to be
public servants. The employees are subject to transfers like any public servants.
Given this set up, it is more like unit of State PWD but with great executive autonomy
under stipulated policy of Central Government. As noted earlier, the lean structure of
NHAI is not adequate to carry out turnkey based projects for Phase- I&II.
2) Anomaly between Commercial and Public Purpose: NHAI is constituted as

a corporate body having perpetual succession and a common seal, with power, subject
to the provisions of the NHAI Act. Most importantly, it is clearly mentioned under
this Act, the Authority shall act, so far as may be, on business principles. However
under this Act, land needed by Authority shall be deemed for a public purpose and
such land may be compulsory acquired for the Authority under the provisions of the
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National Highways Act, 1956. In case of BOT projects, land is made available to
entrepreneur free of cost though the projects are framed on commercial basis. This
issue will be more relevant from Phase III onwards when land acquired for public
purpose is put to commercial use for long period and land owners are not paid on
commercial basis. One more issue is, presently, the land acquired on public concern is
not accounting for commercial appreciation of abutting land. If the land acquisition is
planned as a part of area development, the issues of land acquisition and
compensation to land losers can be integrated in to developmental externality of
NHDP. But the area development is not viewed by NHAI as apart of NHDP. Hence,
the externalities are encashed by land speculators which is partly shared by local
statutory bodies at later stage. The area development based land development rather
than land acquisition has mammoth scope for NHDP. This concept is already inbuilt
under BOOT based or Corridor development based PPP projects. The land being
“State subject” the role of NHAI (under Central Government) will require big amount
of preparatory work that is missed under hasty schedule of NHDP and land has
remained simply as an inert input material to Phase-I &II. As per Act, NHAI is
authorized to construct offices or workshops and establish and maintain hotels,
motels, restaurants and rest-rooms at or near the highways. But commercial
development is not integrated with NH development as discussed above.
3) Delays Due To Transfer of NH Alongwith Pending Issues: The Central

Government may, from time to time, by notification in the Official Gazette, vest in, or
entrust to, the Authority, any National Highway or any stretch thereof as may be
specified in such notification. The NH transferred with State level issues like utility
shifting and additional land acquisition problems are beyond the lean administrative
capacity of NHAI. The NHAI is engaging retired Government servants to ease the
interdepartmental delays but the best agency for these purposes was State PWD who
could have maintained the stretches till the hurdles were removed and till the
contractor was awarded the NHDP work.
4) Ownership of NH Assets: The Act is no way transferring ownership of NH to

Authority. In fact with out explaining to NHAI, a NH can be reverted back and
handed over to' suitable person/entity/concemed State Government with recourse to
required money from Authority fund as decided by Central Government in future.
More over, the Central Government may (by notification in the Official Gazette)
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supersede the Authority for such period, not exceeding one year (subject to further
extension) in case of say continued default by Authority in complying Central
Government’s instructions. These entire mean, Authority simply follows Central
Government in framing its goals and carrying out operations and hence if it borrows it
is in fact Sovereign debt with explicit guarantees made by Central Government. It
goes with out saying that business principles will be always outweighed by policies of
Central Government time to time. Similarly, cess funds are also not dedicated to
NHAI. Hence, NHAI has no authority to leverage on cess income and also on NH
assets by it self.
5) NHAI as A Mini Public Investment Board: The Authority shall submit

budget for the next financial year, showing the estimated receipts and expenditure of
the Authority and forward the same to the Central Government. The annual reports
and audit reports shall be laid before each House of Parliament. This is like
establishing public responsibility for otherwise expected business based operations of
NHAI. For the development of the golden quadrilateral, government has given NHAI
an overall project approval and has left it to the Board of NHAI to accord detailed
approvals for each sub-projects. The NHAI has as its part time members- Secretary,
Ministry of Road Transport and Highways; DG, Roads; Secretary, Expenditure; and
Secretary, Planning Commission. Thus NHAI has been so constituted to function as a
‘mini Public Investment Board’. This empowering of NHAI to accord project
approvals within a framework of an overall project approval has very considerably
facilitated the expeditious award of contracts for the NHDP ( GQ) and their
implementation. But it has not helped in designing proper framework for PPP.
6) NHAI Debts Are Sovereign debts: Regarding finance, the Act states that
Central Government may, after due appropriation made by Parliament pay to the
Authority, on such terms and conditions as the Central Government may determine,
by way of loans or grants such sums of money as that Government may consider
necessary for the efficient functioning of Authority. All these shall be credited to a
fund called the National Highways Authority of India Fund. The money so credited
will be utilized for servicing liabilities, salaries and expenses for assigned functions.
The Authority may, with the consent of the Central Government borrow money
from any source by the issue of bonds, debentures , recourse to overdrafts, such other
instruments as it may deem fit for discharging all or any of its functions under this
177
Act. The Central Government may provide necessary guarantee in such cases. Using
this provision of Act, NHAI has borrowed some funds from ADB and Indian market
issuing Tax exempt bonds. The issue is it is the Government who borrows for
development work irrespective of project economics of NHDP. The matter of
underutilization of borrowed funds was brought out by CAG (CAG 2005) wherein it
was revealed that after obtaining bond money, the lack of actual progress compelled
NHAI to park the money in fixed deposits. The CAG observations are covered under
subsection: 4.8.4. The external assistance in terms of loan is supplied to NHAI in
terms of grant and loan where loan proportion is minimal and thus NHAI has
. implemented NHDP so far basically on budgetary allocations. The year wise
financing of NHAI operations is available under Table:IV-15. As per this data,
borrowing of NHAI has been exceptional only during FY 2002-03.
Table: IV-15
Financing of NHAI (Rs. in crores)
Year Cess External Borrowing Budgetary Total
assistance against 54 EC Support
Grant Loan Bonds
99- 1032 492 0 0 0 1524
2000 (68%) (32%) (100%)
2000- 1800 461 120 656.62 0 3037.62
01 (59%) (15%) (4%) (22%) (100%)
2001- 2100 887 113 804.44 0 3904.44
02 (54%) (23%) (3%) (20%) (100%)
2002- 2000 1202 301 5592.94 0 9095.94
03 (22%) (13%) (3%) (62%) (100%)
2003- 1993 1159 290 0 0 3442
04 (58%) (34%) (8%) (100%)
2004- 1848 1239 361 0 0 3448
05 (54%) (36%) (10%) (100%)
2005- 3269.74 2400 600 1289.00 1400 8958.74
06 (36%) (27%) (7%) (14%) (16%) (100%)
2006- 6407.45 1582.5 395.5 1500.00 110 9995.45
07 (64%) (16%) (4%) (15%) d%) (100%)
Total 20450.19 9422.5 2180.5 9843 1510 43406.2
(47%) (22%) (5%) (23%) (3%) (100%)
(Source: Economic Survey 2006-07)
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The actual financing of NHAI is summarized from Table: IV-15 schematically under
Figure: IV-1. The area between the line of total expenditure and line of Cess+
Extemal Assistance(loan and grants combined) gives market borrowings and
budgetary support.
Figure: IV-1
NHAI Spending on NHDP
99- 2000-2001 - 2002-2003-2004-2005- 2006-

2000 01 02 03 04 05 06 07
—Cess —Cess+EA FY
-3- Total Expenditure_______
(Source: Economic Survey 2006-07)
4.7.3.2 Problems with Long Term Financing of NHDP:
The financing of NHDP so far raises many issues related to long term sustainability of
NHDP.
• The spending capacity of NHAI has remained average about Rs. 5,000 crores
per annum over the period 1999-2007 whereas Eleventh Plan Working Group
expects investments of Rs. 17,000 crores per annum through NHAI (deducting
for private investments during this Plan period) considering financial
assumption under Table: IV-14.
• It was widely recognized by the Government that a simple reliance on
competitive markets is unlikely to produce efficient outcomes in
infrastructure, a sector with pronounced ‘public goods’ characteristics of “non-
179
rivalness” and “non-excludability” (Economic survey 03-04) and hence public
financing was chosen in initial Phases. The summary of sources of finance
available with the NHAI is all about public money mainly through cess and
Sovereign borrowings. Hence both are subject to limit under given structure of
taxation of Government. The direct tolls (after deducting operation and
maintenance expenses) collected on completed stretches are estimated not to
contribute much to support cash contracts. Hence the direct private investment
based on tolling is being stressed by Government to push the NHDP further.
But the ground efforts do not seem deep routed to harness PPP on wider scale.
The Government stand was very significant at the end of Ninth Plan as felt
from Economic Survey 1996-97. It says, during the period of transition from
100 per cent state investment in infrastructure towards increasing participation
of the private sector, there will be continued need for state support in many
infrastructure projects. In this regard, it is imperative to promote public-private
partnerships. The Government should also take significant equity positions in
projects to crowd in commercial equity and debt, and once the project
becomes viable, disinvest and reinvest in new projects in the nature of a
venture capitalist. (Economic Surveyl997-98) But here, very less private
sector participation is achieved and equity contribution is not found much
demanded either (see Table: IV-17B above which says average awarded cost
is hardly 10% of total project cost though the limit is up to 40%)i.e. only those
projects seems taken up which are perceived viable. More over, refinancing
type of exit for above said short tenure partnership of Sovereign is also not
promoted so far. Here, Chinese way of Corporatization and securitization to
divest the public body of the project once the project cash flow has stabilized
seems relevant example and no such mechanism is embedded anywhere in
Indian PPP policy so far. It is necessary to note that concession agreement for
PPP now allow up to 40% of cost sharing but the risk of project formulation in
terms of viability assessment is thrown to private sector alone from bidding
stage itself When government is allowing own equity, it is nothing but reduced
cost of project to that extent. The project viability concerns are far beyond
reducing initial project cost. For innovation, NHAI has attempted Annuity
based BOT projects with different mode of delivery as compared to is known
mode of investor’s toll based BOT. This is like British- practice where direct
180
tolling is not preferred whereas India has committed direct tolling by applying
1997 fee rules on NH.
In a meeting held under the chairmanship of the Prime Minister on March 15,
2005 (GOI Report 2006), it was decided that “As regards the issue of EPC
versus BOT, it was agreed that for ensuring provision of better road services,
i.e. higher quality of construction and maintenance of roads and completion of
projects without cost and time overrun, contracts based on BOT model are
inherently superior to the traditional EPC contracts. Accordingly, it was
decided that for NHDP Phase-Ill and onwards, all contracts for provision of
road services would be awarded only on BOT basis (either based on Toll or
Annuity or a suitable Toll/Annuity hybrid), with EPC awards being made in
specified exceptional cases only.” Emphasizing on potential of PPP route,
Government has put restrictions on Sovereign borrowings for NHDP. Core
Group of Planning Commission (GOI Report 2006) has decided to allow all
estimated future cess funds and toll revenues to be the borrowing limit so that
debts are serviced from these projected funds. Core Group has estimated cash
flow from 2005-06 to 2030-31 and has concluded that the borrowings within
this limit will require all the projects from Phase-Ill onwards to be awarded on
BOT (Toll) basis only. Again the PPP route is confirmed to be inevitable by
Core Group and cess and toll revenues are found just sufficient to serve
maintenance of completed stretches, grant portion of BOT(Toll) projects,
Consultancy charges , land acquisition, utility shifting and servicing of market
borrowings in case of annual deficit etc. However, the Eleventh Plan
Working Group recognized that internationally, the share of Highways
network which could be improved through PPP is limited to 15% to 20% and
hence suggested to correct policy. Now it is decided to offer all projects first
trader BOT (Toll) route inevitably based on feasibility studies so that the
serious bidders are met with. Then the annuity mode is verified before
resorting to cash contracts. In such case, approvals are required for all
revisions of decision. Hence it will consume lots of time and will lead to lack
of seriousness among the bidders also. Thus only clarity seems existing at
planning stage is BOT (Toll)format shall be tried out at feasibility level and
instead of purely item rate cash contracts that exists under State PWD mode of
181
execution shall be totally replaced by outsourcing based EPC contracts that
suits to lean set up of NHAI. In totality, it leads to conclude on future of
NHDP that the GOI is yet not committed to PPP route because it has no
innovations except meager application of BOT format (either on toll otherwise
annuities) and hence, in future most of the green field projects will be taken up
on cash contracts like it happened for Phase -I&II.
• If NHAI has future course of action involving lesser privately placed direct
investments then current receipt based cess and other resources are small to
cater to NHDP requirement of funds. Hence, NHAI will be required to borrow
to carry out EPC and or annuity based projects (even grant portion of BOT
(Toll) will require NHAI to borrow). The problem of NHAI is it has neither
the assets nor right on dedicated cess funds. Hence, any borrowing will require
approval of GOI is it would be GOI debt. This in turn is tantamount to
cessation of NHDP in want of funds or subject to change in priority among
other sectors, sudden demise of this ambitious project.
• Though the investment in highways is lumpy and on long term basis, NHAI
has not explored market borrowings as a permanent source of financing. In
fact India has no market existing (like US4 where bond financing was found
quite useful in constructing the Interstate highways leveraging on user
charges) for such long term commitments based on securitization of cess and
toll revenues.
• Thus not only Phase-I&II, cess is going to be long standing source of
financing NHDP. But the cess is based on fuel consumption and any
technological gain in fuel efficiency of vehicles or invention of new
technology leading to non taxable (e.g. solar based) or bio fuels which will
be promoted by Government itself , all such factors are not considered in
framing cess revenue support to NHDP. The present cess is like fixed
surcharge and is not even linked with increase in fuel prices or inflation.
Hence, long term sustainability of financing of NHDP using cess revenues is
not reliable. The anticipated outcome could be either increase in toll rates on
completed stretches or increase in cess or halting of NHDP in want of
adequate funds.
182
• Overall, hard budget constraint on borrowings, inadequacy and vulnerability
of cess revenue, resistance to toil increases on completed stretches leaves it to
private investments in BOT (Toll) projects as only tool available to push the
NHDP further from 11th Five Year Plan onwards. Any decision to opt for BOT
(Annuity) or EPC could mean unforeseen revenue requirements and may
hamper the sustainability of NHDP.
The rhetoric declaration on PPP is not really found committed and it is most likely
that cash contracts would dominate the NH development irrespective of continuation
or discontinuation of NHDP and NHAI. This is what MOSRT&H has done through
State PWDs who have been separated from NHDP for growth of NHAI. But as
discussed below, the State PWDs are valuable species with tremendous executive
capacity not only for cash contracts but also for PPP route. The involvement of State
PWDs in NHDP seems a potential way for augmenting executive capacity of NHAI.
4.8 TWIN SUPPLIERS OF NH DEVELOPMENT & THEIR

CONVERGENCE:
Presently, 43,705 km of National Highways are entrusted to the State Government /

Union Territories for the stretches of National Highways passing through the
respective States. The NHAI has been entrusted with 16,117 km of National
Highways included in various phases of National Highways Development Project
(NHDP) and other important National Highways. Other 5,512 km of National
Highways in difficult 10 border areas are with the Border Roads Organization (BRO).
Some 1256 km length of National Highways is yet to be entrusted to the
implementing agencies (GOI 2007: Working Group 11th Plan Report ). Thus, State
PWDs on behalf of MOSRT&H and NHAI are two suppliers of NH development as
far as undertaken study is concerned.
The mandate for NHAI to take up NHDP required shrinkage of MOSRT&H though
Ministry has been engaged in maintaining & developing all N.H. from July 19425. In
the past, the respective State PWD carried out NH activity till NHAI really got
operational in 19956. The major activities of NHAI started from year 2000 onwards.
The NHAI is presently (2007) entrusted only 25% of total NH in India while 65% of
NH is still managed by State PWD. The performance of State PWDs has remained
183
impressive till NHAI got operational and divested them of NH stretches passing
through their States.
4.8.1 Implementation of NH Works Through State PWDs:
Basically after emergence of NHAI, MOSRT&H has preferred to assign limited

maintenance of NH in the hands of State PWD and few original works if the NH is
not part of on going NHDP. Historically, NH has grown enormously since last fifty
years as below since independence and so far NHAI has contributed almost nothing in
this statistics.
Table:IV-16
Achievements of National Highways after Independence
(Mainly through Budgetary Allocations)
Period Total Widening to Widening to Strengthening Major
Length* two lanes four lanes of pavement Bridges
(km) (km) during (km) during (km) during (Nos) during
period period period period
1947-1969 24,000 14,000** Nil Nil 169
1969-1990 33,612 16,000 267 9,000 302
1990-1997 34,298 3,138 483 5371 51
1997-2002 58,112 1,955 797 3511 91
2002-2003 58,112 710 418 1109 14
2003-2004 65,569 671 799 1489 17
2004-2005 65,569 221 841 1087 1
(Upto October,2004)
* Length at the end of the period. ** Includes a length of6,000 km which were already
two lane at the time of declaration as National Highways.
(Source: GO! Report (2005):National Road Transport Policy Document)
The above data includes NHAI operations in Tull swing after 2002. Before shrinkage
of MOSRT&H (that is shrinkage of role of State PWDs) the role of State PWD is
found very much impressive during 1997-2002 (Ninth Five Year Plan). The PWDs
have more or less achieved NH targets inspired by massive NHDP movement initiated
in that period.
184
Table: IV-17
Achievement of Whole NH Sector during Ninth Five Year Plan (1997-2002)
(Mainly Through State PWD)
Achievements Widening Widening Strengthening Bye- Constructing
during period to to of weak 2 lane passes Major
1997-2002 two lanes four lanes pavement (km) (No.s) bridges/ROB
(km) (km) /RUB &
rehabilitate
ns of bridges
(No.s)
Target 1791 944 3042 59 633
Achieved 1955 797 3511 30 442
(% of target) (109%) (84%) (115%) (51%) (70%)
(Source: Based on GOJ Report (2005): National Road Transport Policy Document)
The Tenth plan document also lauds achievements of State PWDs relating to four-
lanning, two-lanning, strengthening of roads during the Ninth and Tenth Plan period,
keeping in view the availability of funds. Some shortfalls in construction of bypasses
and bridges are explained primarily due to the time-consuming process of land
acquisition and shifting of utilities in the case of bypasses. Construction and design
problems are also found responsible especially for major bridges. The point of
reference is, one of the recommendation of Dr. Rakesh Mohan Committee (Mohan
1996), was to set free NH sector from State PWDs and vesting all interest and
responsibilities to sole special purpose body i.e. NHAI.
The major difference in modus operandi of State PWD under administration of

MOSRT&H and NHAI is, the former agency is traditional, more self servicing and
seeking numerous approvals at competent levels while NHAI works more like self
competent autonomous project implementation unit. NHAI carries minimal staff but
tenders out all of its activities for speedier implementation.
The Table: IV-18 & 19 explain the difference between availability of scale of funds
for NHDP and other NH managed through State PWD. Under NHDP alongwith cash
contract, works under externally aided projects (EAP) has also suffered in terms of
financial progress in Tenth plan period. Regarding NH (O) (i.e. NH other than BRO
and NHDP), the budget approvals to works under various annual plans are only 86%
(total BE is Rs. 7972.70 crores and total tenth plan outlay is Rs. 11864.00 crores) of Tenth
plan outlay as mentioned in Table: IV-19. This is not understandable since it is always
made felt that other NH faces heavy resource crunch. The annual plans are approved
1S5
by MOSRT&H for the estimates submitted by States PWD. Hence, it is either State
PWD has not proposed sufficiently to use the plan provisions or Ministry has gone
thrifty in approving the State proposals. Compared to this, NHAI (Table: IV-19) has
crossed Tenth plan outlay limits by 38% in approving annual plans and hence
expenditure has also exceeded by 13.50% over Tenth plan outlay. As far as physical
progress and achievements are concerned, annually, Ministry based projects (through
State PWD) seems quite reasonable while NHAI could not achieve completion of
Golden quadrilateral by Tenth plan is sufficient to describe lagging. As given under
Table: IV-19, for NHDP Phase III (actually to be taken up on BOT basis), it was
targeted to spend Rs. 1500 crores for preconstruction activities but could manage only
Rs. 750 crores of expenditure.
Table: JV-18
Financial Performance of NH other than NHDP (i.e. without NHAI) during Tenth Plan
(Rs. in Crores)
Year* Outlay in Annual plan Actual expenditure

Budget Estimates Revised (%®f BE)
(BE) Estimates (RE)
2002-03 1594.80 1520.98 1434.74
(90 %)
2003-04 1604.80 1569.00 1500.59
(94 %)
2004-05 1595.50 1659.50 1448.65
(91 %)
2005-06 1627.30 1581.00 1573.68
(97 %)
2006-07 1550.30 NA 1008.99
(upto31-1-07) (65 %)
(upto31-1-07)
Tenth plan total
approval: EAP: 529.10 EAP: 15.55
EAP: 3200.00 NH(O): 7443.60 NH(O): 6951.10
NH(0): 8664.00 TOTAL: TOTAL: 6966.65
TOTAL :11864.00 7972.70
* These are year wise total amounts for External Assistance Program (which is
insignificant) & NH (O) regular Head For State PWD (predominant). They
combinely represent State PWD achievements on average. The Statistics For BRO
are separate and not considered here.
(Source: GOI (2007):Working Group 11"' Plan Report)
186
Table: IV-19
Financial Performance of NH under NHDP during Tenth Plan
(Year Wise Total Amounts for External Assistance Program, Cess /Investments &
NHAI Phase III) (Rs. in Crores)
Year Outlay in Annual plan Actual expenditure

Budget Estimates Revised (%of BE)
Estimates
2002-03 4003.00 3503.00 3503.00(88 %)
2003-04 4287.74 3441.90 3441.90 (80 %)
2004-05 5058.00 3848.00 3447.58(68 %)
2005-06 7669.74 6919.74 6919.74(90 %)
2006-07 8495.45 NA 6850.00(81 %)
(upto31-1-07)
Tenth plan total EAP: EAP: 8501.48
EAP: 10789.50 12485.74
Cess/investments: Cess/investments: Cess/investments:
10500 .00 14910.74
NHDPIILO.O 15518.19
TOTAL :21289.50 NHDPIII: NHDPIII:750.00
1510.00 TOTAL:
TOTAL: 24162.22
29513.93 (this is
due to inclusion of
NHDPIII from
2005-06)
(Source: GOI (2007): Working Group lltk Plan Report)
Looking to the above facts, State PWD seems quite valuable agency for NH sector
which was ignored for realizing a massive unified highway programme like NHDP.
Instead, creation of an autonomous and special purpose vehicle, NHAI is opted by the
Government for implementation of NHDP.
4.8.2 Plight Of NH Vested in State PWD By MOSRT&H:
The NHAI is given very structured future plan of development of NH under NHDP
(Phase I to VII) at an whooping estimated cost of Rs.173,501 crores to be invested
during 2007-2012. Even after future transfer of NH from PWDs to NHAI for NHDP,
MOSRT&H estimates huge funds requirements for improving other NH (NH(O)
Head). The Ministry considers a length of 21,090 Km of National Highways will still
187
remain collectively with State PWDs and BRO (at present they manage 43,705 km &
5,512 km respectively) after transferring decided stretches to NHAI. If the
deficiencies are to be removed from NH to be managed by PWDs and BRO in next
two five year plans, Rs. 45,000 crores (at 2005 prices) or an average fund of Rs. 4,500
crores per year is required on NH other than NHDP. The reality is, average fund
allocation under NH (O) Head is about Rs. 2,000 crores per year to this Ministry for
Non-NHDP sections & thus a shortfall of Rs. 2500 crores under NH(0) head
allocation every year is likely to exist. A financial crunch is also found on
maintenance & repairs (M&R) of other NH. The actual funding under M&R need in
10th Plan has been only to the extent of 40% of requirement which is simply
continuation of old tradition of losing priority in garnering scarce resources.
Interestingly, the Department-related Parliamentary Standing Committee on
Transport, Tourism and Culture (2003) quotes the MOSRT&H - “The
requirement of funds for the maintenance and repairs of National Highways has gone
up from Rs.55.50 crores in 1981-82 to Rs.2200 crores in 2002-2003. During this
period, the length of National Highways has increased from about 29,000 kms. to
58,112 kms. The volume of traffic carried by the National Highways has also
increased by 8-10% per annum thereby requiring more funds. Further, the rise in
labour wages and steep increase in prices of materials particularly petroleum products
in recent years, are reflected in the higher cost of maintenance and repair of National
Highways. However, the actual availability of funds has been about 40 to 50% of the
requirement. Therefore, within the available fund allocations the objective of
preservation and proper up keep of National Highways on year-to-year basis is very
difficult to be achieved.” (Parliament of India ( 2003) rDemands For Grants Report
2003-2004)
A comparison of the year-wise fund provided for maintenance and repair of NHs
from 2002-03 (i.e. from start of full swing operations of NHAI) to 2006-07 shows that
(Table: IV-20) this varies to the tune of about Rs. 730 crores to Rs. 870 crores per
annum as against the annual requirement of about Rs. 2,000 crores per annum as per
the norms set up by the Department of Road Transport & Highways. The gap between
the requirements as per norms and allocation has been accumulating over the years
and now poses a threat to the system. Maintenance being a non-plan activity there is
188
also a tendency by the Government to apply ad hoc cuts in the face of resource
constraints [Para 6.1.4 of 11th Five Year Plan document].
The fact is corroborated from details of the allocation proposed by the Ministry and
the amount provided to them in this sector during the last few years (Table: IV-20).
Table: IV-20
Constrained Funding of M&R for NH Sector
Year Normative Amount provided Shortfall % Shortfall

Requirement (Rs, Crores) (Rs. Crores)
Project to
Finance (Rs.
Crores)
1998-99 1000.00 549.80 450.20 45.00
1999-2000 1250.00 703.00 547.00 44.00
2000-01 1350.00 702.50 647.50 48.00
2001-02 2000.00 725.00 1275.00 64.00
2002-03 2200.00 800.00 1400.00 63.64
2003-04 2200.00 731.74 1468.26 66.74
2004-05 2480.00 745.56 1734.44 69.94
2005-06 2100.00 868.10 1231.90 58.66
2006-07 2012.00 814.38 1197.62 59.52
(Source: Demands for Grants Report 2003-2004 and for 2002-03 and onwards from
Working Group 11'1' Plan Report 2007)
Referring back to TableIV-3 above, it is seen that major declaration of NH occurred

in Ninth Plan & then in Tenth Plan. The Planning Commission emphasizes in its
document for Tenth Five Year Plan that the upgradations of large segments of State
Highway to National Highway during the Ninth Plan has been a contributory factor to
poor maintenance and riding quality of the non-NHDP National Highway network as
the available resources are spread thinly. Hence, plight of NH roads under State PWD
is compounded due to declaration of new NH with out proper financial commitment
and the situation can remain so in future as newly declared NH is first handed over to
State PWD.
189
The paucity of funds is really haunting the NH not yet taken over by NHAI or
precisely, till anticipated development work is awarded by NHAI. In the process, the
executive capacity of State PWD is ignored by divesting them of whole NHDP.
The Ministry continues to rely on the States PWD to develop and implement projects
on National Highway stretches which remain within its jurisdiction. Of late, to repeat
the fact, the Working Group on Roads (2007-2012) for 11th Five Year Plan admits
that the PWDs are basically a strong institution and need to be preserved. Account
codes and works manuals in the States PWD are well developed over a period of time.
However, the Working Group suggests that they need review in the light of
procedural changes made at the Central level to keep up with the latest technology.
Also, there should be proper synchronization of the workings of the procedures and
systems at the Central and State levels. Many State PWDs have established a separate
organization for implementation of the works on National Highways. The Working
Group also continue to suggest further that State Governments should develop these
National Highway departments by posting the officers having experience only in
roads and bridge works. Due to present emphasis on private sector participation for
development and maintenance of National Highways systems and procedures in the
State PWD are required to be amended. The recognition of State PWD as a strong
institution for carrying out NH activities is quite a diverging stand taken by Working
Group. Recalling the recommendation of Dr. Rakesh Mohan Committee to set free
NH sector from State PWDs and various subsequent steps taken from late 1990s for
limiting role of State PWD in NH sector ( in terms of franchising out technical
activities and only assigning job of shifting of utilities, removing of hindrances, co
coordinating land acquisition procedure etc.) was tantamount to killing this very
skilled species from the arena of road sector. The rhetoric argument to shun
government intervention is simply meant limiting traditional job of State PWD. Of
course, handing over basic infrastructure to private sector has also its own problems
as would be explored later. Before really analyzing PPP, the cash contracts executed
by NHAI are worth understanding because this is the prime mode of delivery not only
for State PWDs but also for NHAI given the scanty outcome of private sector
investment in NHDP. Moreover, though a project is undertaken on BOT basis, the
actual civil work is executed by local contractors who in turn sign typical cash
190
contract with BOT concessionaire and thus cost and time overruns are basically
hinged with such contracts.
The role of State PWD was recognized right from initiation of operations of NHAI.
The MOSRT&H Report (2003) for expenditure reforms while suggesting on
‘Rationalization of The Functions, Activities And Structure Of The Ministry Of Road
Transport And Highways ’ quotes that- “The continuing division of responsibility for
National Highway development between the Ministry of Road Transport and
Highways and the National Highway Authority of India (NHAI) has resulted in
different approaches to the delivery of road projects, including on technical and
quality issues. Care should also be taken to ensure that NHAI does not become a
behemoth, by itself wanting to develop and maintain the entire network. It should as
far as possible resort to special purpose vehicles (SPVs) and the BOT and annuity
routes for implementing projects. It should also encourage State Road Development
Corporations to participate in the development of National Highway projects and use
the state PWD, where appropriate, so that their expertise is also availed of. In
developing and implementing projects, NHAI should as far as possible adopt a
corridor approach and develop an entire corridor instead of small stretches at different
places”. Instead of expected convergence of roles of these two agencies, NHAI seems
to be somewhat conflicting with State PWD in development of NH.
4.8.3 NHAI Way of Executing Construction Works (Other Than PPP):
The NHAI way of contract frame work and contract administration is quite similar to
State PWD except that NHAI has to seek very less approvals once the project is
approved. Also, NHAI has maintained lean staff structure favouring construction
supervision and quality assurance through independent consultants and thus
traditional role of Engineer -in- charge is outsourced. This is like separation of role of
Employer (though itself is technically sound) from role of Engineer. This is an
approach recommended by FIDIC (Federation Internationale des Ingenieurs Counseils
i.e. The International Federation of Consulting Engineers). FIDIC conditions are
framed to provide more equitable environment for Contractor. The appointment of
Independent Engineer in terms of construction supervision consultant (CSC) is a
major step in safe guarding claims of contractor for work done and reducing aspect of
duress. The major aspects in NHAI operations are allowing defect liability from
191
substantial completion of stretches instead of waiting for overall completions of work.
How ever, NHAI has deviated little from FIDIC practice by assigning duty of test
checks to Project Director (NHAI) on the measurements recorded by consultant. The
appointment of construction supervision consultant is not possible under State PWD
execution because MOSRT&H is paying State about 9% of approved cost as an
agency charges for activities like supervision and this is a major difference in
operations of these two agencies. The comparison for working of NHAI and State
PWD for non PPP work on NH is described below:
Table: IV-21
Modus Operand! for Cash Contracts
Aspect NHAI State PWD

Plans and NHAI seeks annual gross The annual plan approvals plus
estimate approvals from Central work wise technical proposal,
approvals Government (Finance detailed estimates, bid
department, MOSRT&H) documents etc. is required to be
approved from MOSRT&H and
then from highest cadre of State
PWD.
Bidding For work above Rs.10 crores, After obtaining Job number
process and NHAI has own standard bidding (that is administrative approval
awarding the document otherwise basically for sanctioning estimated cost
work bidding forms and process is of a work from MOSRT& H),
same as State PWD from tendering is done at State level.
bidder’s perspective. The same As per amount of estimated
technical specifications & cost, tendering is carried out at
standards are adopted by State relevant level of State govt. If
PWD and NHAI as provided by more than Rs. five crores, a
Ministry of Shipping, Road standard biding document
Transport & Highways, Indian prescribed by MOSRT&H is
Roads Congress, or Bureau of used for inviting bid offers.
Indian Standards. However This bid form is carrying
NHAI frame work is more essence of FIDIC practices and
flexible to adopt latest empowers Engineer (he is from
international standards based on State Government) for
proposals of CSC who is providing equitable conditions
generally multinational and minimized approvals. The
consultancy firm. The major awarding of work is through
difference between NHAI and letter of acceptance from State
State executed project is scale of Government and the contract is
project cost and almost all signed between Contractor and
192
projects taken up with State Government. Hence, in
preparation of Feasibility Study, case of disputes, State is
Preliminary project report and respondent and liable for all
then Detailed project report operations of work. Though
before inviting bids. All these State has multi level approvals,
reports are prepared by it completes scrutiny of
specialized consultants. These received bids and awarding of
types of studies are rarely work even faster than NHAI.
assigned for State executed
projects. Before calling of bids
for a project, approval of
chairman NHAI for calling bids
shall be taken in each case. The
bid documents are approved by
Member NHAI. The entire
process from the date of receipt
of bids to award of contracts
should generally be completed
within 40 days.
Pre bid meeting For tenders of maintenance The States often allow pre bid
works costing more than Rs. 20 meeting for major works.
crores or original works costing
more than Rs. 50 crores or works
of specialized nature, a pre-bid
meeting at a specified place and
time is conducted, any
ambiguities felt by bidders are
recorded in minutes. The
Member NHAI will generally
provide clarifications to all
bidders and may issue
modifications to bid documents.
Pre Pre-qualification is necessary for Pre-qualification is necessary
qualification all works costing more than for all works costing more than
for bidding Rs.50 crores and other complex Rs.5 crores and other complex
or special works, irrespective of or special works.
their value. For works costing
between Rs 5 crores to Rs. 50
crores, and for works under
special circumstances,
contractors shall be post-
qualified. In first case, it is two
193
stage bidding and hence only the
prequalified bidders will submit
financial bid. In case of post
qualification, bidding is in two
covers and only for those passing
in technical bid, (Le. first cover)
the second cover of financial bid
will be opened for evaluation.
For works costing less than Rs 5
crores, under open bidding, bids
from contractors already
registered with the State PWDs,
Railways, MES, CPWD and
other engineering organizations
approved by NHAI, are
considered. The PQ details
gathered by NHAI are more
elaborative than State executed
process.
Land The Project Director (PD) of The Executive Engineer of
acquisition and NHAI is fully responsible (PD is PWD (it is district level position
utility like Chief Engineer in State for State PWD) is fully
hindrances PWD) for handing over clear responsible for handing over
ground to the contractor. clear ground to the contractor
Removal of encroachment, and for removal of
unauthorized access etc. is encroachment, unauthorized
managed by PD. access etc.
Execution of The successful bidder will The successful bidder will

civil work execute the work under execute the work under
stipulated tender conditions. The stipulated tender conditions.
Engineer in charge is mostly The Engineer in charge is
independent Construction mostly Executive Engineer of
Supervision Consultant (CSC) PWD. Few contracts now allow
appointed for the work. The independent quality Assurance
Project Director (PD) of NHAI consultants for quality auditing
has limited obligation on test and quality control during
check basis for checking the execution. Traditionally,
quality and quantity of work. Executive Engineer is fully
empowered in rejecting or
approving work done for
making payment.
194
Measurements PD will issue Measurement Executive Engineer issues such
taken for Books, Level Books and Field books for records of work done
payment Books to the CSC and CSC will to subordinating engineers. The
work like PWD in terms of books are verified by Executive
maintaining records and Engineer while endorsing
overseeing the construction. The payments.
CSC is required to exercise
physical checking at various key
personnel level before proposing
the work done for payment. The
team leader of the Supervision
Consultant is required to check
measure 5% of the value of the
measurements and the Resident
Engineer is required to check
measure 10% of the value of the
measurements before any Interim
Payment Certificate (IPC) is
submitted to NHAI.
Check on PD will random test check 3% of The Executive Engineer checks
Contractor by the measurements, including 3% 10% of amount of work to be
Employer test checking of all hidden items paid and 5 % of Original
(i.e. items getting hidden or Ground Levels/ Reduced Levels
immeasurable with further where as his deputy checks 50%
progress) of the work and all for bituminous items and 100%
items for which the quantity for hidden items. Here, the
exceeds more than 25% of the Employer is also Engineer in
tender quantity, before making charge. All the testing is got
payment of any running/fmal done by the representative
bill. Engineer from office of
Executive Engineer.
Project Director shall also
exercise test check at least 3 %
of Original Ground
Levels/Reduced Levels (like
hidden items) recorded by the
Supervision Consultant in the
Level Book. PD also test checks
quality control tests at least to
the extent of 3%. This mean, PD
is additional check on work done
to be paid.
195
Payment to The measurements recorded by The measurements recorded by
contractor CSC in measurement book are representative of Executive
basis for making payment to Engineer in measurement book
contractor. All measurements are basis for making payment to
should be recorded neatly in the contractor. The signature of the
Measurement Book. The contractor or his authorized
signature of the contractor or his representative is obtained in the
authorized representative is measurement book for each set
obtained in the measurement of measurements. Executive
book for each set of Engineer can also give similar
measurements. The PD makes type of payment for non
payment through Drawing & availability of detailed
Disbursing Officer (DDO) after measurements as an advance
exercising checks as above or at payment in specific cases only.
least releases . 75% of amount For NH works, one Regional
certified by CSC keeping Officer is posted by
pending 25% for scrutiny. This is MOSR.T&H for certifying all
like first pay and then verify bills of State PWD and payment
approach. is directly given by Pay &
Accounts of Central
Government to the contractor in
the form of D.D. So payments
to contractor get first go from
Executive Engineer and then
mostly smoothly followed
through Regional Officer.
Post execution The payment of CSC is based on This aspect is yet to be adopted
evaluation man days and is through PD. On by State PWD. But civil
completion of the project, PD contracts provide for defect
writes confidential performance liability period of one to two
appraisal report of the CSC and years.
CSC writes for the contractor.
The civil contracts provide for
defect liability period of one to
two years. But performance of
CSC is accepted for making
payment to contractor with out
challenge.
(Source: Derivedfrom actual practicesj
Thus it is evident that if a work is executed by NHAI for works other than PPP, there
will be agreement between Contractor and NHAI as both are primary party interested
196
to be engaged in a construction work. One separate agreement between NHAI and
CSC will also take place where CSC is just a mechanism as per original contract
between Contractor and NHAI for fulfilling contractual obligations. The role of CSC
and PD (NHAI) are totally taken over by State PWD if the MOSRT&H assigns the
work to State PWD. In every case, the contract and laid down standards shall prevail
if followed in spirit by executing agents. In figure IV-2, the role of each player is
elaborated while carrying out mad/ bridge work on NH by NHAI. As given below,
though Employer NHAI is basically a technical body, it is not involved in execution
activity and it prefers project formulation and monitoring. Except few test checks (3%
and it is trivial to conclude about work done), NHAI will be paying contractor as
certified by Engineer. In case of defects, the Engineer’s decision is binding for fixing
responsibility of contractor and for carrying out remedial measures. Thus if CSC and
Contractor develop common interest, the contract management is not serving interest
of Employer. At the most NHAI can penalize CSC for 10% of fees or can spoil
credentials through making reports. But practically it is difficult to penalize and fix
responsibility. Vice versa, the Employer though pays to contractor; he has limited
influence on outcome of project. Earlier, MOSRT&H relied on State PWD for
outcome of NH project by allowing full influence of PWD on contractor. Now in case
of NHAI, it is relying on a private independent entity while spending multiple of what
it had been spending through PWD.
197
Figure: IV-2:
Execution of NH Works by NHAI (non PPP)
(Source: Derivedfrom actual practices)
The above role of Employer is like facilitator for providing smooth working of
contract under the rule of contract and least influenced by Employer. The Employer or
Contractor has to route any conflict through Dispute Resolution Board (DRB) which
198
is a panel of experienced representative of primary parties who were agreed upon by
both parties during bidding process. The DRB is supposed to act in solution finding
manner. The next stage for dispute resolution is Arbitration and it is more in legal
terms and it is followed by Court of Justice if any party desires so. The contractor
produces work programme incorporating all mile stones to be achieved in execution
as prescribed in bidding document. The work programme is like bench mark for
verifying time overrun and if there are events either due to underperformance of
Contractor or beyond his control, Engineer specifies and attributes the cost of time
overruns as per contract. If mile stones are missed out then contract provides for daily
basis penalty (1/2000 of Contract price per day delay called Liquidated Damages) for
time overruns due to Contractor and may freeze escalation cost for work executed in
extended time period. The Liquidated Damages are maximum 10% of tender cost and
escalation costs can be even higher if most of work is executed during extended time
period. If time overruns are due to unforeseen reasons, late approvals, late hindrance
clearances or change in scope, the Contractor can claim prolongation cost and
escalations from Employer.
The cost overruns are attached to time overruns and are covered as above. The cost
can also overrun if the Engineer suggests extra quantity or new items which were not
included in bidding document. The Contractor is compensated by allowing fixation of
appropriate rates for such variations. The cost overruns due to escalations are mostly
covered under contract conditions. The problems may occur while fixation of rates if
the Contractor is not agreeing with compensation. In case of State PWD they follow
established schedule of rates which are generally lagging from current market rates. In
NHAI case, the CSC has capacity to follow market trends and that is encouraging for
Contractor. Generally contracts are found designed to safe guard cost overruns as
above if Contractor follows time schedule as per agreed work programme. So, it is
correctly stated that- Time is Essence of Each Contract.
To summarize, non PPP projects on NH are now adopting equitable conditions like
international standard practices like FIDIC and dispute resolution is also now as per
international practice through DRB & Arbitration & Reconciliation Act(1996) before
exposed to traditional litigations. The time overruns and cost overruns are provided
fair cover under contract. So, overseas investors can feel congenial ambience in taking
199
up such investment projects either through cash contracts or PPP route because
construction practices under PPP route are more or less same as cash contracts. In
case of State PWD, the local contractors have been used to produce goods so far and
using updated standard bidding document for works from Rs. 5 crores to 100 crores
(which also has essence of FIDIC & is at par with NHAI conditions except provision
of independent supervision entity) the contract provisions are more explicit & safe
guard legitimate interest of cost and time overruns for Contractor. States PWD do
accommodate provision of independent third party (private) inspection for quality
assurance and quality audits in lieu of minimizing role of Government in contract
management. The intentions are aimed at better PSP for satisfactory implementation
of NH works.
4.8.4 Performance of Changed Agency Preferred by NHAI:
Though at present, NHAI is implementing NHDP making a clear break from the State
PWDs and has established a new paradigm for the delivery of road projects, generic
problems are found same as faced during State PWDs execution. The NHAI has
resorted to consultant based (alternatively to say outsourcing based) approach for
almost every aspect of work including supervision but the out come is not
encouraging as revealed by Comptroller and Auditor General of India7 (CAG) report
(CAG 2005). It is the supervision that was mainstay of State PWD in the development
of NH and NHAI has replaced State PWDs with private Supervision Consultant. The
supervision aspect is very critical area of whole contract for projects other than BOT.
The supervisory authority verifies records and accepts the work for payment and that
holds duress capacity too. Any time overrun, cost overrun and qualitative aspects are
under the purview of supervisory authority. Even for BOT type of projects, if contract
provides, such authority has some say before putting the facility open to traffic. The
facts and issues in NHAI way of execution are brought to notice by CAG and are
useful for undertaken study as CAG has access to many internal aspects of execution
which are rarely known to any researcher.
1. NHAI follows FIDIC (International Federation of Consulting Engineers)

system of project supervision and project execution. This is an internationally
accepted form of contract which allows definition of Employer, independent
Engineer and Contractor with their defined roles such that the contractor
200
works under equitable conditions and do not get exposed to duress of
Employer i.e. Government body like NHAI or earlier it was PWD. Hence-the
project management including day-to-day supervision, quality assurance,"
issuance of working drawings, approval of mix formulae for road layers,
approval of variations and their rates, measurements of work done and
certification of payments to civil contractors, recommendation of Extension of
Time (EOT), levy of liquidated damages (LD that is fine for time overrun) etc
is entrusted to an independent technically qualified contractor called Project
Supervision Consultant (PSC i.e. CSC) selected through competitive bidding.
It shall be clear that role of PSC is larger than Employer who shall merely
ensure hurdle free site to contractor and shall pay the contractor under
stipulated time frame once the bill is certified by the Engineer i.e. PSC. The
Employer (i.e. NHAI) is interacting with contractor through PSC and if PSC is
satisfied with performance of contractor, Employer shall ignore any
underperformance no matter if not found self convincing. CAG finds working
of PSC dubious and imperfect project formulation (preparing feasibility and
all kinds of project reports, finalization of quantity estimation and
specification for bid purpose, etc.) by the project consultants.
Auditors were critical about performance of design consultants also.
Preparation of accurate and realistic Detailed Project Reports (DPR) was
missed by NHAI in many cases. Hence, executed cost of projects exceeded the
awarded cost of project very widely - from 12.26 per cent to 86.82 per cent.
The CAG probably views it as an incomplete base work before floating bids
and hence wasteful payment for preparing DPR e.g. earthwork in excavation
in two stretches varied by as much as 6,449 per cent in addition to other items,
which varied between 83 per cent and 498 per cent. Similarly, construction of
embankment in one stretch varied by as much as 1,08,150 per cent. In one
case, NHAI itself did not rely on DPR prepared by consultant and bid was
prepared differently. When this work was executed , the actual expenditure did
not tally with bid or DPR. Ironically, the execution was done by same
consultant who prepared DPR. Thus consultant and NHAI both could not
anticipate nature of work involved. Any bidder would expect reasonable
estimates of contract value and any variation would mean negotiating rates for
excess quantities. Such variations could also mean changing requirements on
site under local demands or change in design parameters on site but in every
case it can be a deterrent for a contractor who is interested in finishing out job
at earliest' The effect of such variations can be fatal for a BOT concessionaire
who wants to start tolling at earliest.
3. The perfunctory DPR had many omissions like- omission to include correct
area of land in land acquisition map prepared by the DPR consultant for the
two stretches. It led to delay in completion by four months in one stretch and
revision of drawings for shifting of utilities at an excess cost of Rs. 1.01 crores
(over BOQ cost) led to delay of nine months in another stretch. In one more
stretch, omission to provide additional land amounting to Rs.25.16 lakh for
realignment resulted in delay of 12 months in handing over the site to the
contractor; some discrepancy in sub-soil investigation for a bridge for the
same project led to delay of six months and excess cost of Rs. 1.75 crores;
inaccurate estimates prepared for another stretch not only led to variation of
Rs.15.11 crores but also resulted in execution of additional work of Rs.9.62
crores not provided for in DPR; the diameters of foundations for two bridges
and design of foundations for three bridges for a stretch had to be changed
during execution due to incorrect information provided by the DPR
consultants. This enhanced the cost by Rs. 12.48 crores, besides depriving
NHAI of competitive rates at the time of initial award of contract.
4. The auditors lament that there were delays in award of contracts ranging from
1 to 30 months in respect of 30 stretches involving 2,889 km. There were
instances of inadequate planning/inequitable tendering, ineffective contract
management by NHAI and Project Supervision Consultants (PSC) and sub
standard quality of work executed by the contractors in the implementation of
NHDP Phase-I. These resulted in delay in completion of the project and
increase in the cost. Time overrun ranging from one to twenty eight months with
r
a cost over-run of Rs.692.62 crores in 13 out of 27 stretches was mainly attributed
by audits to above reasons.
5. After inviting bids from the pre-qualified bidders, NHAI should have awarded
the contracts at the earliest or invariably within a period of 180 days as per the
bid condition. NHAI delayed the award by two to seventeen months (average
delay 5.7 months) after receipt of bids for 10 stretches leading to avoidable
extra cost due to price escalation.
202
6. The auditors expected that NHAI could have standardized projects of similar
nature for its costs and quality to facilitate cost comparison at the time of
preparation of estimates, award and execution of works. The contracts for
widening and strengthening of highways stretches were awarded in length
ranging between 5 km and 126 km. An analysis of contracts for nine stretches
relating to three sets of contiguous stretches awarded concurrently indicated
that the cost per km varied widely from Rs.1.86 crores to Rs.4.20 crores.
NHAI did not analyze the reasons for variations. In respect of three stretches
in Vijayawada-Chilkaluripet, the same contractor executed the contracts but
disparity in rates was noticed resulting in extra expenditure of Rs.26.34 crores.
The audit generally calculates losses based on possible lowest rates. The audit
considers such variations as inefficient project monitoring in public interest.
Similarly, eleven contracts provided for price escalation on all permanent works,
variation items, and day works. Two contracts provided for escalation on
permanent works and variation only. Fifteen contracts provided for price
escalation on variations only. Contract stipulations for many stretches quoted
differently for estimating price escalations and recovery of advances and
audits pressed for standardizations of such clauses to exclude possibility of
subjectivity and anomalies.
7. From 1995, the Government has exempted all goods supplied and machinery
used in highway projects approved by it and funded by World Bank and Asian
Development Bank from levy of customs/excise duties. NHAI failed to
include a clause in the notice inviting tenders that the bidders should quote the
prices excluding customs/excise duties as exemptions were available to them
for World Bank works and thus lost the opportunity to have reduced cost of
contracts.
8. NHAI paid Rs.4.22 crores to the contractors in respect of two stretches on account
of reimbursement of royalties of various materials, which were already included
in the price variation payments. The NHAI has reportedly agreed to recover such
amount.
9. NHAI awarded two bids to second lowest bidders at their bid prices not following
its practice to bring down the second lowest bidders to match their rates with the
lowest bidders who could not qualify due to lack of bid capacity.
203
10. NHAI could not effect recovery of Rs. 14.14 crores in terms of contract clauses
from a contractor as it did not keep the Bank Guarantees (BGs) submitted by the
contractor alive for the required period. In another contract, the contractor
submitted forged BGs and obtained payment of interest-free advance from NHAI.
NHAI could not make recovery of Rs. 10.30 crores because there was no security
available with it. The auditors observed that NHAI continued accepting forged
BGs up to July 2004. This is an indication of inadequate machineries at PIU level
for NHAI.
11. The Government had instructed NHAI to restrict consultancy charges to six per
cent of contract price. NHAI foiled to restrict the cost of supervision consultancy
to six per cent. The actual percentage ranged between 1.49 and 11.16 in 32 cases.
This observation of audit needs mention that State PWD works for NH projects
with 9% agency charges per contract.
12. NHAI granted extension of time (EOT) without invoking the contract provision
for liquidated damages (LD) for delays attributable to the contractors. Despite
delayed execution attributable to the contractors, the recovery was not proposed
resulting in non-levy ofRs.51.49 crores in respect of five packages.
13. The PSC did not perform 8 out of 14 mandatory tests in two stretches. The
modified bitumen used at site failed four out of seven tests conducted by
technical audit. No evidences for PSC approval of Wet Mix Macadam (WMM
i.e. a layer of metal surface) design before use were traceable. These shortfalls
under the direct supervision of the PSC were felt by CAG defeating the
purpose of engaging highly qualified PSC engineers.
14. On financial management side, auditors found undue parking of borrowed
funds by NHAI. NHAI had a cash surplus of Rs. 1,769.32 crores (including
interest accrued and due) in March 2000. Subsequently, during the three years
ended March 2003, it mobilized additional funds through market borrowings to
the extent of Rs.7,054 crores through Capital Gain Bonds at interest rate ranging
from 10.5 per cent to 7 per cent per annum. Further Bonds amounting to Rs. 1,461
crores were raised during 2000-01 and 2001-02 by NHAI despite having net
surplus of Rs. 1,602.77 crores ending 2001-02. In the absence of matching ,
financial progress of NHDP, these funds were parked in fixed deposits. NHAI
subsequently redeemed bonds to the extent of Rs.656.61 crores during 2003-04
but the whole exercise revealed typical Government Touch to financial
management of long term resources.
204
15, NHAI was slow to introduce tolling on the completed portions of the road and lost
about Rs.42 crores due to delayed decisions/notifications. This was probably a
question of willingness to charge on so far free roads. The audit estimates that
owing to delays and overpayments, the projected cash surplus of Rs. 13,239
crores in Phase-I by the end of 2011-12 (as claimed by NHAI) is not likely to
be achieved and there is high probability of NHAI suffering cash deficit at the
end of 2011-12 besides undischarged liabilities to the extent of Rs, 1,940.62
crores.
16. Concluding on this audit, CAG remarked that imprecise terms of contract with
the design consultants, who were responsible for preparation of detailed
project reports (DPRs) and project supervision consultants (PSCs), who were
responsible for supervision of the works and their underperformance
constituted the foremost risk to the NHDP. The contract terms of both the
consultants did not provide for performance warranty and penalty for
underperformance. Specifically, underperformance by PSCs entailed a high risk
of overpayments and quality compromise. The auditors feel that NHAI does not
have a detailed corporate plan to carry out such a large investment programme.
All that Auditors mean, NHAI is not handling the NHDP as was envisaged and the
PIU kind of limited staff set up with layers of outsourcing of planning and
management of project is not working in correct spirit. One straight answer could
emerge that if NHAI has been provided with thin administrative set up that suits best
to BOT type of projects, expertise of State PWDs shall be employed for turn key
projects at least where executive capacity of State PWD is evident. Ideally, State
PWDs shall be encouraged to compete with private consultants for supervisory job,
but that seems impossible due to shortage of staff in State PWDs for works under
own Government. Also, question of State employment competing for Central work
needs supportive policy framework.
One more evidence for underperformance of consultant based implementation of

highway projects is provided by CAG but this time for State PWD project in Gujarat.
Despite having proved executing capacity of State PWD, as per norms of World Bank
funding State was compelled to engage design consultant and supervision consultant
for executing World Bank assisted Highway project.
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The auditors (CAG 2002-03) observed that:
1. The contracts are framed as per FEDIC specifications and any delay in payment to
contractor by the Employer (here it is Government of Gujarat) would invite
interest @ 12%. Due to delay in making payments to the contractors,
Government had to pay interest of Rs.23 lakh to them. This is mainly due to
State being not used to pay contractors in tight schedule.
2. The project design consultant provided design report and also provided bidding
documents for widening and strengthening of some State Highways. But after
some execution, many contractors reported inadequacy of designs and attributed
pavement failures to them. The PSC and project design consultant revised the
design and asked to insert a granular sub base layer which required removal of
overlays due to progress of work achieved so far. The audits estimates additional
financial burden of Rs.24.82 crores due to revision in design. This is
significant remark of CAG Because, like NHAI, here also the design,
supervision and quality assurance was vested with private consultants but with
out accountability. The work progress of World Bank assisted contracts were
also reported unsatisfactory and thus effectiveness of consultants was under
question.
3. Though the item of Built up spray grout was to be followed by Open graded
carpet, then no tack coat was required while laying OGC but the contracts
were prepared for OGC with tack coat as per routine specification. In a work,
though quarry was available near by, the estimates were prepared based on
remote quarry with out justifications. Such technical blunders could have fixed
whole set up of PWD staff if they were involved in design and supervision.
Here, consultants are not held liable for such blunders due to incomplete
contracts.
Basically, the imperfections in project planning and management are similar for State
PWD and NHAI when both worked on the same platform of FIDIC with the help of
consultants. For time being we can say that the consultancy business is not yet
professionally matured to give desired outcome. However, the ignorance of traditional
role of PWD in development of NH is the main issue in managing NH during and
after completion of targeted development under NHDP.
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4.8.5 Implementation of PPP Projects BY Both Agencies:
As noted before (section 4.5.2), MOSRT&H was the pioneer in inviting private sector
participation from 1995 when NHAI. was also functional but was busy with ADB
projects. The scope of all these pioneering BOT projects was more focused to
construction of bridges and some bye-passes. Year wise PPP projects undertaken by
MOSRT&H through State PWD are listed in Table: IV-22a. These 25 projects
included 13 bridges; 6 bye-passes; 1 tunnel and only 5 projects of four lanning of road
sections. The construction of bridges & bye-passes are generally conceived to be
viable BOT toll projects due to element of monopoly. Since MOSRT&H has given
first priority given to NHAI vis-a-vis State PWD route of execution, the quantum of
private sector participation was never equitable looking to the executive strength of
Ministry through State PWD. Notwithstanding this, except one ROB project delayed
by few months the all remaining BOT projects are found well completed in time. As
per records, MOSRT&H has not executed any annuity based BOT so far. One
interesting fact comes to light that outlay of MOSRT&H (for NH other than NHAI)
managed by State PWD was Rs. 7522.52 crores for period between 1996-97 to 2001-
02 and Rs.11864 crores for Tenth Plan(2002-07 ) thus total Rs. 19386.52 crores for
1996-97 to 2006-07. These were the years when above said PPP has occurred (as
deduced from approvals and project status) for Ministry amounting Rs. 1406.31
crores. Hence MOSRT&H has seen PPP to the tune of 7.0% of total investment
during this decade.
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Table: IV-22: A
Public- Private Partnership in NH Development by MOSRT&H (BOT).
Calendar Year Of No. Of Projects Total Project Cost Rs. in
Approval Approved Crores
1995 1 103
1996 2 34
1997 4 286.3
1998 6 225.06
1999 3 109.68
2000 & 2001 0 0
2002 1 48
2003 4 286.12
2004 2 167.15
2005 2 147
TOTAL 25 1406.31
(Source: Derivedfrom MOSRT&H Annual Report 06-07)
Due to taking over most viable NH stretches from State PWDs, NHAI has seen
manifold private investment under PPP route (Table: IV-22:B) but percentage share
in total investments in NHDP has remained not really encouraging. For NHAI, the
share of Annuity based projects has remained almost one third of total PPP. Now,
annuity based projects are nothing but secured returns (Fixed Payback) on
investments in deferred installments. Hence, any contractor who has been executing
cash contracts of five or more years of contract period will consider it a case of
delayed payment only but benefited by predecided returns on investments which was
not always possible under cash contracts. Hence, admissibility of annuity projects as a
PPP project is a dilution of original concept of PPP. Notwithstanding this, if NHAI
achievements during 2006 are kept aside, NHAI has awarded only 19 BOT (Toll)
projects and 20 Annuity based projects which mean total 39 projects in nine years.
20S
Table: IV-22: B
Public- Private Partnership in NHDP by NHAI
Calendar Year No. of BOT Projects Total Project Cost Rs. in
Of Approval Approved Crores
Toll Annuity Total Toll Annuity Total
based based
1998 1 0 1 18 0 18
1999 1 0 1 70 0 70
2000 0 0 0 0 0 0
2001 2 0 2 760 0 760
2002 4 8 12 2106 2353.7 4459.70
2003 1 0 1 644 0 644
2004 1 6 7 450 2126.71 2576.71
2005 4 1 5 1736.09 418.04 2154.13
2006 36 5 41 12403.60 2452.60 14856.2
2007 5 5 10 2655 2060.44 4715.44
TOTAL 55 ' 25 80 20842.69 9411.49 30254.18
(69%) (31%) (100%) [69%] [31%] [100%J
Total Project Cost is not actual Private Investment due to availability of grant.
I) Awarded Project Cost (Except Negative Grant 2823 1286 4109
portion) i.e. Public Share Demanded by
Entrepreneurs at Aggregate Level (Rs. In
Crores)
II) Negative. Grant Offered by Entrepreneurs at -1223 0.0 -1223
Aggregate Level (Rs. In Crores)
Total (I+II) i.e. Net Awarded Project Cost (Rs. In 1600 1286 2886
Crores)
Net Awarded Project Cost As a % of Total Project 7.7% 13.7% 9.5%
Cost At Aggregate Level
(Source: Derivedfrom MOSRT&H Annual Reports & NHAI Progress updates as on
30-9-07 accessed on www.nhai.org)
Going Phase wise, as on 30-9-07 (i.e. at nearly completion of GQ) - the total
expenditure of GQ is reported to be Rs. 27484.91 crores (public funds) and net private
investment (after deducting grants or adding negative grant offers) is Rs.3254 crores
i.e. private investment is 10 % of total investment for GQ and thus NHAI has
financed GQ basically from government allocations only. Since, Phase II has seen
only 22% of progress; extent of private sector participation is very early to derive. But
considering above details, the performance is likely to be better than GQ case. Thus
whether it is MOSRT&H or NHAI, when government is spending for example Rs.
209
100 crores on NH it sees parallel private investment of around Rs, 10 crores only and
it is not encouraging as a new paradigm for the delivery of road projects. The
autonomous route of implementing NHDP then seems in need of corrections. It is
clear that NHAI and Ministry both have preferred very fragmented approach for PPP
by selecting scattered but obviously viable stretches in wide network. So, the PPP
based investment in this decade has remained modest. Unlike MOSRT&H, NHAI was
envisaged to derive ways & means of private sector participation for realizing
historical level of investments under NHDP. But frame work never anticipated better
than 10% of private share which was attained by MOSRT&H also in its scale with the
help of State PWD. Extracting above data further, it is found that NHAI is far away
from PPP so far. NHAI could arrange private investors as late as after 2001.
The recent reports of MOSRT&H and Planning Commission (GOI (2007):Working

Group 11* Plan Report) emphasize on PPP for balance NHDP with more private
investments. This seems now easier with some experience so far and mainly due to
high density traffic on selected stretches in Phase-III,V &VI. The Phase III are high
density traffic corridors not included in Phases-I & II; (ii) providing connectivity of
state capitals with NHDP (Phases-I&II); and (iii) connectivity of centers of tourism
and places of economic importance. The Phase V is six lanning of already crowded
mainly GQ. Under Phase VI, access controlled four / six lane divided carriageway
expressways are proposed. The financial assumptions under Table: IV-13 assumes
private sector investment of Rs. 94820 crores in total under newly taken up Phase-IH,
V &VI up to Year 2015 and that is approx. 70% of total estimated cost of Rs.138516
crores for these three phases. This can be termed unprecedented but the selected
stretches are commercially quite viable and hence we can expect better response from
investors if properly invited. The awarding of stretches under Phase-IIIA & Phase-V
is underway as given in earlier Table:IV-ll. Almost 50% length under Phase-IIIA is
awarded under PPP (total awarded km=1881; 36 km on Annuity basis and remaining
on BOT (Toll)). While 148 km are awarded on BOT (Toll) under Phase-V and that is
merely 2% of total 6500km. All these 148 km are awarded on negative grant because
they are between Vadodara-Bhafuch-Surat on NH-8 (i.e. high traffic density corridor).
The Phase-IIIA & V were approved long back in 2005 and in that sense the NHAI
seems lagging in awarding the stretches. No awarding is found under Phase-VI yet
which is recently approved.
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Though limited commitment is shown by Government for PPP projects as discussed
above, three explicit steps are taken to encourage PPP in NH segment that has
widespread impact on PPP projects for other roads also. Government has offered
some incentives in PPP projects irrespective of specific needs of individual PPP
project. They are mainly:
1. Road Sector has been declared as an Industry.
2. Foreign Direct Investment (FDI) up to 100% under automatic route.
3. Provision of Capital Subsidy up to 40% of the project cost to meet the viability
gap funding.
4. Provision of encumbrance free site for work, i.e. Government bears expenses
for land and pre-construction activities.
5. Easier external commercial borrowing norms.
6. Duty free import of high capacity and modem constmction equipments &
Excise exemption.
7. Higher concession period, up to 30 years.
8. 100% tax exemption in any consecutive 10 years out of 20 years.
9. Right to collect and appropriate toll revenues.
10. Arbitration and Conciliation Act 1996 based on UNICITRAL provisions.
Financially, the excise and customs exemption benefits on material and equipment;
the tax holidays for ten years (now Minimum Alternative Tax is applicable in any
case) and easier foreign investments are attractive benefits to concessionaire of PPP
project. However, except tax holiday benefit, all incentives are admissible cash
contracts as well. For PPP projects, all benefits and obligations are covered under a
concession agreement which is contractual agreement between Government and
concessionaire.
The second step is finalizing and implementing Model Concession Agreement for
PPP projects which has long standing regulatory effect on development of roads in
general and NH in particular. Third one is, the process of approval of PPP projects for
NHDP costing from Rs. 250 crores onwards is routed through specialized committees
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of members from various ministries and that has separated approval of PPP projects
for NHDP from other public expenditure based projects.
4.9 USE OF MODEL CONCESSION AGREEMENTS FOR PPP IN NH

SEGMENT AND ISSUES:
The earlier BOT projects were taken up by MOSRT&H based on a contract form on
the lines of cash contract except some operational stipulations. Looking to the need
for a standardized contractual format for wider scope of NHAI, a High Powered
Committee (HPC) was constituted by the Government of India in 1997 to evolve the
standard documents for PPP projects. This also included the Model Concession
Agreement (MCA) which was finalized during the year 1999.The same has been
revised by Planning Commission in 2006. The salient features of MCA (2006) are as
below. Necessary comments are provided in analyzing the provision of MCA in
respective paragraph whereas noteworthy issues are derived separately at the end of
subsection.
1. Bidding Criteria: Instead of keeping concession period as a bidding

criterion, the concession period is predetermined by Government based on
prevailing traffic at the bidding stage subject to limitation that concession
period terminates when the proposed road gets full design traffic. The MCA
(i.e. for this study purpose it is revised in 2006) tentatively suggests twelve
years of concession period for four lanning projects and twenty years of
concession period for four lanning projects providing six lanning at later stage
within concession period. MCA suggests within twenty years of concession
period, six lanning shall be available by end of eleventh year of concession
period. The inbuilt capacity augmentation clause is not stated as mandatory
but it is supposed to phase out investments that can reduce grant requirement
for viability. In any case, construction period is kept at two years for four
lanning work that is included within concession period as above.
Thus, departing from usual practice of bidding based on concession period offer, it is
the grant demanded from Government has been kept as a bidding criterion. This is
exactly the point raised by Alfred Marshall (Kerf et al. (1998)) that the competition
for the franchise shall tarn on the price or the quality, or both, of the services or
the goods, rather than on the annual sum paid for the lease. The MCA is missing
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this point and hence the constitution of MCA is focusing on cost implication of
concession and is silent over user’s perspective.
2. Base Case Submission by Bidders: The bidders shall bid in a open

competitive bidding with base case financial model indicating grant or
negative grant required during the project period supported with bid security
as an earnest money. Also, yearly concession fees payable to Government
shall be quoted by the bidders. The base case shall atleast assume concession
fees ( a concept to achieve revenue sharing in progressive manner as the
project progresses) of Rs. 1 per annum for first nine years and from then
onwards 1%, 2%, 3% etc. per annum respectively of project revenues for
tenth, eleventh, twelfth year etc. The base case shall specify Net Present
Value (NPV) of base case and this NPV is protected under change in law type
of events. The assumptions for calculating NPV (e.g. discount rate) are not
specified by MCA. The base case shall have traffic projections based on
generally yearly 5% compound growth rate and shall estimate revenues based
on toll rates specified which are escalated at only 40% of increase in Whole
Sale Price Index (WPI).
Thus MCA has standardized traffic projections and the bidder is inclined to estimate
almost same revenues but bidders can differ on estimating WPI and input costs like
construction costs. MCA is silent over debt financing of project cost leaving financing
of project under the purview of concessionaire.
3. Grant Amount to Concessionaire: This is like viability gap funding availed

to ensure that commercially less viable projects are also put under PPP route.
The MCA provides capital grant at maximum 20% of total project cost
(exclusive of anticipated equity support) as an equity support but not more
than actually equity invested by concessionaire. MCA also provides for
additional grant at maximum 20% of total project cost for O&M support
admissible during operational period if specifically required for viability, case
to case basis. It can be a negative grant case also.
Financially this provision can be viewed as reduction in project cost for the bidder to
accommodate financial returns through predecided toll rate structure. However,
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clauses like these need not usher in flow of private sector investment for green field
projects if returns on investments are not seen secured by private sector. A bidder may
appreciate same financial relief in terms of assured returns instead of cost sharing
while working in greenfield conditions.
4, Responsibilities of NHAI/Ministry: MCA is explicit regarding role of

public authority granting concession. The way Concessionaire is supposed to
maintain performance guarantee against possible under performance, MCA
uses same performance guarantee as a base to punish public authority if right
of way is not timely availed to concessionaire hurdle free. The public authority
shall provide necessary coordination with other public bodies. The public
authority shall maintain the facility up to award of work to the level existed at
bidding stage. The role of public authority becomes most vital when Force
Majeure events are met with. However, a major job of shifting of utilities met
with during civil works is left to the concessionaire and any delay due to non
cooperation of utility holders/owners is excused to the concessionaire.
The NHAI is having very thin organization and hence the role of utility shifting is
passed on to the concessionaire if met during construction. This is major source of
time overrun and occurs due to incomplete project preparation. Since NHAI has no
hold over local conditions, MCA expect the concessionaire to toil for the problem.
But involvement of local body (e.g. State PWD) can give relief to concessionaire in
his obligations.
5. Construction and Maintenance of Facility: The specification and

standards are listed by MCA but bidder can deviate if he can justify with cost
implications. MCA provides for appointment of independent engineer (IE) to
test check construction and ascertain proper maintenance. Independent
engineer certifies completion of civil work to start tolling. Any delay in
completion is liable to attract penalty to concessionaire in addition to
reduction in toll period due to fixed total concession period. IE can allow
tolling if facility is substantially completed and remaining work (that is listed
under Punch list) can be completed within specified period. A change in
scope is admissible in the interest of project and extra cost is compensated
mostly in cash to the concessionaire. The maintenance of facility is governed
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by maintenance manual and lane closure for more than reasonably allowed
period for maintenance can attract daily fine at 0.1% of daily fee receivable
per every 250 meter of road closed. Similarly, any default to maintain the
facility free from damages will attract fine per day at specified % of average
daily fee collection.
The issues are listed under subsection 4.8.4 as brought out by CAG (2005) due to thin
set up of NHAI and heavy dependence on consultants like IE shall remain a sensitive
issue for any project under PPP.
6. User Fee : Except exempted class of vehicles all vehicles are asked to pay
tolls as per NH Fees Rules (1997) and base rates derived using the WP1 at the
time of opening to traffic are provided in the bidding document i.e, draft
concession agreement. MCA provides for rebated user fee for frequent users
and additional fees for over loaded vehicles. Now allowing overloaded
vehicles involves Road Transport Offices of State Government but this
complicated issue is linked with concessionaire’s obligations. The MCA
(1999) provided heavy rebates to local users but this revision exempts local
traffic from paying tolls. The concessionaire is compensated for handling local
traffic on monthly basis. Most significantly, MCA (2006) provides differential
toll rates to distinguish between peak and off peak traffic. The peak hour
premium is allowed up to 25% whereas off peak discount is stipulated double
of peak hour premium. Also, off peak hours are stipulated to be taken as
double of peak hour period. MCA is not defining peak period traffic in terms
of traffic volume. During operations, fees are revised every year on account
of variation in WPI. But the variation up to 40% of WPI variation for that year
is applied to base rates.
Thus some effort is made by Government to incorporate value pricing and effect of
WPI variation is given only to the extent of 40%. This means emphasis is given to
efficiency aspect in this MCA. The value pricing however will require complete
picture of availability of alternative routes and its service standards. A flat provision
as above will be generally avoided by concessionaire.
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7. Free Service Roads: If service roads are provided, local traffic will not be
exempted on main carriageway. The service roads shall be useful to segregate
and divert slow vehicles from main carriageway. A distance of maximum
10 km is treated toll free from entry point of facility to location of toll booth.
Any extra toll cabins for catching evasion between two toll plaza is allowed at
the risk and cost of Concessionaire.
Generally near urban intersections, local traffic creates many problems for the
concessionaire and it is accepted by MCA by allowing them free and facilitating
service roads for them. The estimation of tollable traffic is however not known to
Government or bidders and that is detrimental to viability of PPP project. The above
clause only reduces the operational resistance from local traffic.
8. Traffic Risk Shared Partially: This revision of MCA has most important
feature of sharing traffic risk partially in terms of extending or reducing , the
concession period. Independent yearly traffic sampling to ascertain actual
traffic was introduced in MCA (1999) which is also included in this revision.
One of such traffic sampling is stated to be undertaken on a predecided target
date (generally on completion of tenth year of signing of agreement). A target
traffic is found applying 5% compound growth rate to base traffic on bidding
date. If actually surveyed traffic falls short or exceeds target traffic by more
than 2.5%, the concession period is adjusted for that correction. In such case
every 1% of traffic shortfall is adjusted with increase in concession period by
1.5% but subject to maximum 20% of original concession period. Similarly
for every 1% of excess traffic over target traffic, concession period is reduced
by 0.75% but subject to maximum 10%. This clause shall not be
misunderstood as a full traffic guarantee. The clause is measuring deficit in
traffic realization at a specific point of time within the concession period and
is compensating the deficit in terms of extension of toll period. If it turns out
to be year of economic recession, MCA has no discrimination and the
concessionaire could be a gainer. A separate stipulation asks to verify if actual
traffic exceeds design capacity within any accounting year and it happens for
three accounting years thereafter, the concession agreement is terminated with
compensation to concessionaire.
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Limiting of concession period based on actual traffic is very good provision for long
term concessions otherwise, a toll project will be crowded up and sustainability of toll
policy can be affected. In any case, annual cross verification of actual traffic helps in
assessing losses to the concessionaire in the event of claims. However, applying 5%
growth rate to arrive at anticipated traffic is ignoring potential of many busy corridors.
In fact such percentages shall be stipulated based on potential of individual project.
9. State Support Agreement and Construction of Additional Tollway: MCA

allows construction of competing tolled facility joining the same destination
points not before 12 years of concession period for four lane project and 15
years of concession period for six lane project. A State support agreement is
signed by concerned State not only for conferring upon monopoly power but
also to support the development process of NH for utility shifting , land
acquisition etc. The Sovereign also surrenders immunity to legal proceedings
on this commercial but mutual agreement.. The additional tollway will
increase the concession period ( no cash compensation except termination
case) and reduce concession fee payable to authority. The fees for additional
tollway are predetermined at 1.25 times of fees on existing toll road for every
category of vehicle. If the additional toll road connecting the same destination
points is 25% longer than project highway, it can not be termed as additional
competitive toll way for compensation.
The State support agreement is like surrendering State priorities of road development
for sustainability of NH toll roads and hence it has met with loud resistance. Also, it
can be adverse to development of CORE NETWORK advised to be developed under
GOI Vision 2021.
10. Subsistence Revenue and Revenue Shortfall Loans: MCA agrees for
definition of Subsistence Revenue as- the total amount of fee revenue that is
required by the concessionaire in an accounting year to meet the sum of (a)
O&M expenses subject to annual ceiling of 3% of the total project cost
(inclusive of grant portion) for first operational year. For subsequent years, the
same should be based on WPI. (b) Debt service in such accounting year but
this sum shall be checked for already any compensation paid by authority on
account of Force Mqjeure event. MCA offers revenue shortfall loans at 3%
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above bank interest rate if after due diligence concessionaire could not realize
revenues atleast required for subsistence. A sum equal to 50% of the “profit
before tax” is required to be earmarked by concessionaire for repaying such
loans with interest in each accounting year.
Actually this provision is taking cognizance of viability concern and Government is

monitoring cost and revenues to some extent that is believed to be concern of
concessionaire. The remedies are inadequate as it merely offers high interest loans but
it brings transparency to private operations which is god for introduction of
mechanism like refinancing etc.
11. Risks and Force Majeure: Like earlier versions of concession agreements,
this MCA recognizes all Non- political events ( e.g. acts of God. Epidemic,
earthquake, floods etc); Indirect political events (e.g. war, invasion, blockade,
riots, terrorist acts, State wide or industry wide strikes etc.); Political event(
e.g. change in law, unauthorized/unlawful Government action etc.) The events
listed are quite self explanatory but MCA requires the affected party to notify
other party within seven days with explanation of financial implication of such
event otherwise the claim is not admitted. The risk matrix is summarized from
provision of MCA in Table: IV-23. In any case if event occurs before financial
close, the date for the same is extended accordingly and both parties shall bear
own costs thereof. It can be clearly observed that all that is discussed under
Force Majeure is related to cost of civil work and short fall in revenues. The
macro economic aspects of interest rate fluctuations and exchange rate risk
etc. are not covered under MCA. Hence, financial risk is absolutely borne by
the Concessionaire.
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Table: IV-23
Risk Allocation under Force Majeure
Sr. Category Effect on Concession
No. of Event Before Project completion After Project Completion
1 Non Project completion Toll period is extended
political milestones are extended but accordingly if toll collection is
events no compensation to either less than 90% of average daily
party collection. If terminated,
authority pays 90% of debt
less insurance.
2 Indirect Project completion Toll period is extended
political milestones are extended. accordingly if toll collection is
events Concessionaire shall claim less than 90% of average daily
from insurance and one half collection. If terminated,
of remaining Force Majeure authority pays debt less
cost* shall be reimbursed by insurance plus 80% of unpaid
authority. insurance claims plus 110% of
adjusted equity**.
3 Political Full cost borne by authority Toll period is extended
events accordingly if toll collection is
less than 90% of average daily
collection. If terminated,
authority pays debt plus 150%
of adjusted equity
* Force Majeure cost includes only interest portion of debt, O&M expenses and
increase in civil costs but loss of fee revenue is not accounted for.
** Equity is adjusted for WPI and depreciation over the concession period.
(Source: MCA2006)
Regarding other risks, construction risk and design risk are borne by concessionaire.
The revenue risk or demand risk or traffic risk or project risk (all of them basically
mean risk in collection of tolls vis-a-vis anticipated tolls) is the theme of any
BOT(Toll) project and it is first time attended under this revision of MCA though
partly to begin with.
The Force Majeure provisions are this time suggesting to assure returns to the tune of
150% on equity in worst case and in general suggests monitoring of toll revenues for
admissibility of above provisions. But the monitoring practice is not elaborated in
MCA which needs some mechanism to be agreed upon from beginning itself. Like
earlier version of concession agreements, here also insurance proceeds are taken up
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seriously with out actual development of insurance industry to offer various policies
suitable to PPP projects.
12. Lender’s Recourse: The MCA provides for substitution agreement to

safeguard debt obligation and all the financial operations are routed through
Escrow account. A stipulation of maintaining financial position of
concessionaire to the same level in the event of change in law also protects
financial interests of all the parties as per agreed upon financial structure of
project at bidding stage. The exact stipulation is, if a change in law effects in
to aggregate financial plus or minus implication of Rs. 1.0 crores and 0.5% of
the realizable toll fee of the accounting year, based upon NPV worked out in
agreed upon financial statement, concession terms are changed or affected
party is compensated outrightly. The MCA recognizes senior lenders and
subordinated debts in case of terminations. Under substitution agreement,
representative of senior lenders is allowed to take over concessionaire’s rights
and obligations before going for termination of contract.
Actually, MCA is not focused on financial aspects except mentioning acceptance of

financial plan at bidding stage and protecting NPV. It is silent over aspects like
debt/equity ratio and discount rate etc. For ascertaining bidder’s sincerity, MCA
stipulates equity of concessionaire firm or consortium in total paid up equity of
project. The stipulations are- minimum equity of 51% during construction period in
total equity (minimum 10% per each equity holder); minimum equity of 33% during
first three years of operations and 26% during remaining period. This is for ensuring
concessionaire’s interest in the project which is not oriented towards refinancing type
of mechanisms.
13. User’s Recourse: The MCA is very silent over actual benefits being rendered
to the road users but is it quite reasonable in terms of securing timely
maintenance as decided by IE. The MCA worries about toll revision but first
time it is limited to 40% of WPI increment. It agrees to maintain traffic cap to
its designed capacity which can be very useful stipulation to thwart congestion
in end portion of concession period. The MCA cares for safety and emergency
services but the way side amenities are not addressed to. There is concern for
safety beyond concessionaire’s obligations and hence a dedicated safety fund
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is suggested to be created from funds like reduction in cost of project due to
change in scope and funds from authority. The safety requirements arising
during concession period is to be met with from this fund. Typically a
complaint register is required to be maintained at site and authority is stated to
monitor the disposal of complaints. MCA mentions that user shall pursue the
complaint under Consumer Protection Act 1986 at his own risk and cost.
The user’s recourse in terms of securing services for the toils being paid is not
embedded in the agreement. The user may be stranded despite paying tolls and he has
no say in tolling policy. The constitution of committee representing user group was
suggested by Task Force on Infrastructure (1998) that is not materialized so far and
also missed by MCA (2006).
14. ' Dispute Resolution Mechanism: MCA provides scope for amicable
mutual understanding under provision of agreement. In case of dispute the
Arbitration tribunal made of one member from each party and chairman is
selected by these two arbitrators to form a three member Arbitration tribunal.
15. No Partnership in PPP: Though popularly BOT projects are labeled
Public-Private Partnership projects and MCA itself is titled as “Public-Private
Partnership in Highways- Model Concession Agreement”, legally, the MCA
clarifies that no partnership is created through this agreement. Exactly it
states- “This agreement shall not be interpreted or construed to create an
association, joint venture or partnership between the parties or to impose any
partnership obligation or liability upon either party, and neither party shall
have any right, power or authority to enter into any agreement or undertaking
for, or act on behalf of, or to act as or be an agent or representative of, or to
otherwise bind , the other party”. This is significant stand clarified by
Government after allowing cost sharing up to 40% of project cost.
Thus the MCA discussed above raises many issues as below:
\
• Basically, MCA is standardized with a vision to induce stagewise capacity
augmentation and hence phased investment with a scope to match with
changing trends of spatial developments. Also, the phased development is
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expected to require lower grant and hence more projects could be taken up
from available Government funds.
• The document is elaborative on civil and traffic aspects but it has not been
viewed under project finance perspective assuming MCA shall be regulating
civil work and cost thereof along with traffic operation and revenues thereof
only. The MCA requires submission of financial base case but it has no
practical use once the work is awarded. Under changing financial conditions
or at regular interval, the financial model is not reviewed to influence the
project economics.
• The MCA provides stringent clauses for obligations of both the parties for
timely execution of agreement. But hindrances met with during execution are
left to the concessionaire alone.
• The major deviation from practices so far being, fixing up concession period
with scope of project and asking bids for minimum costs to the Government.
MCA assumes that provision of partial traffic guarantee and selection of
appropriate stretches will bring up viable PPP projects but this approach can
not foster PPP development to cover all NH sections.
• Similarly the grant up to 40% alone can not provide sustainable PPP projects
at unprecedented scale. The financial management of project cost and
revenues is beyond the engineering culture of this MCA. A project specific
financial analysis can bring out role of both the parties for sustainable PPP
development which requires backing up of sound financial market also.
• The MCA has shortened the concession period up to twelve years for four
lanning project inclusive of construction period. Except heavy traffic flow,
such short period of concession may turn up to be a non viable proposal at
given toll rate structure and ceiling on grant portion. Hence overall, the MCA
is not conducive to foster PPP model for all traffic levels of NH. The MCA is
not having vision to see that all four lanning projects are some how
accommodated under PPP model using project specific solutions.
• The practice of short concession period is in contrast to very long term
concessions being offered in Western countries. The US and European
practice of awarding concession up to 99 years reduces financial limitations
on structuring a PPP project and concessionaire is tied up for future long term
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maintenance and that can lead to sustainable PPP of NH projects. As a
standard practice, authority will put the transferred facility under O&M
contract and tolling will continue on that road for long period. This aspect is
merged in long term concessions to extract full benefits of economical life of
asset. This MCA states that short concession period can give predictability of
traffic and it assumes from concessionaire perspective that long toll periods
will mean lower NPV of future revenues which can distract them from
bidding.
Thus an attempt is made by Government to make PPP more viable based on

provisions of MCA but user’s recourse is missed as was asserted by Alfred Marshall.
The regulation of road as a public utility is governed by such concession agreements
and the MCA referred herewith is imposing price capping by predetermining toll
rates. Additionally, it is curbing revenues also by predetermining of concession
period. The returns are also attempted to be monitored and controlled by limiting
concession period to the date of facility reaching design capacity. More over the
traffic monitoring and partial traffic guarantee is part of regulating returns on the
project investment. All these stipulations are guided by inherent feeling of superfluous
profit in operating such facility. For enabling PPP on unattractive stretches, the
provision of grant for making up viability gap is envisaged to deliver the goods.
However the Government approach for PPP seems in reverse gear when the focus of
agreement is seen limited to least cost to Government rather than fostering value
based pricing for commercial operation of roads. The MCA is attempting to ensure
natural monopoly by securing State support agreement. For controlling pricing, it is
limiting tolls and its yearly increment. Since, roads have remained even at this stage
more available as a free commodity and proportion of toll roads is yet limited to few
roads hence except user’s recourse after paying tolls is the only concern seems largely
unattended. The Demsetz auctioning is partially followed by inviting competitive
bids but then the project is not exposed to market conditions since the concessionaire
can continue to reign for atleast twenty years as per MCA. The optional pull out
offered to concessionaire for not investing in six lanning upgradation is in fact good
scope to expose the agreement once again to open competition if the re-auctioning is
compulsory to assess real worth of project and possibility of sharing benefits with
actual users by reducing tolls if possible in remaining term of concession period. For
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positive aspect of such re-auctioning, the ruling concessionaire who has invested in
four laiming may be given preemption right to continue with next investment for six
lanning but on agreement with lowest offer received through open competition.
4.10 APPROVAL OF PPP PROJECTS BY PUBLIC PRIVATE

PARTNERSHIP APPRAISAL COMMITTEE:
Pursuant to the decision of the Cabinet Committee on Economic Affairs (CCEA) in

its meeting of 27th October, 2005 a Public Private Partnership Appraisal Committee
(PPPAC) has been set up comprising of the following:
[a] Secretary, Department of Economic Affairs

[b] Secretary, Planning Commission
[c] Secretary, Department of Expenditure;
[d] Secretary, Department of Legal Affairs; and
[e] Secretary of the Department sponsoring a project.
The Committee may co-opt experts as necessary. The Committee would be serviced
by the Department of Economic Affairs, who has set up a special cell, called the
PPPAC Secretariat for servicing such proposals. The Ministry of Finance is the nodal
Ministry responsible for examining concession agreements from the financial angle,
deciding on guarantees to be extended, and generally assess risk allocation from the
investment and banking perspectives. It would also ensure that projects are scrutinized
from the perspective of Government expenditure. Ministry of Law and Justice,
Department of Legal Affairs, would also be represented on the PPP Appraisal
Committee, as the concession agreements would require careful legal scrutiny.
Approval of PPPAC:
1. The Central Government has notified a system for appraisal/ approval of

projects to be undertaken through Public Private Partnership (PPP).The
guidelines were notified8 by the Ministry of Finance, Department of Economic
Affairs vide O.M. No. 1/5/2005-PPP dated 12th January 2006. The procedure
specified herein will apply to all PPP projects with capital costs exceeding
Rs.100 crores. [This is now modified by decision of CCEA in its meeting of
22.3.2007 and as per revised guidelines issued vide DEA notification No.
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10/32/2006-inf dated April 2, 2007, projects of cost Rs.250 crores or more and less
than Rs.500 crores (for NHDP it is for more than Rs. 500 crores) will be submitted to
PPPAC for approvals.]
2. As per PPPAC guidelines, pre-feasibility/ feasibility report and a term-sheet
containing the salient features of the proposed project agreements shall be
submitted for ‘in principle’ approval. Only after obtaining ‘in principle’
clearance of PPPAC, the Administrative Ministry may invite expressions of
interest in the form of Request for Qualification (RFQ) to be followed by
short-listing of pre-qualified bidders. The ‘in principle’ clearance stage will
require 3 weeks of time after receiving proposal. In cases where the PPP
project is based on a duly approved Model Concession Agreement (MCA), ‘in
principle’ clearance by the PPPAC would not be necessary. But, final approval
of PPPAC is required before inviting financial bids.
3. Now it is stage for RFP (Request for Proposals), i.e. invitation to submit
financial bids. It involves project document preparation and includes a copy of
all the agreements that are proposed to be entered into with the successful
bidder. After formulating the draft RFP, the Administrative Ministry would
seek clearance of the PPPAC before inviting the financial bids.
4. This RFP is appraised by Planning Commission and it will forward its
Appraisal Note to the PPPAC. Also, Ministry of Law and any other Ministry/
Department involved will also forward written comments to the PPPAC. This
stage is expected to take four weeks for appraisal at above said bodies. If there
are queries, it will be complied by Administrative Ministry.
5. Now the compliance with project documents is resubmitted to PPPAC for
approval, the approval is expected within three weeks. After approval by the
PPPAC, the project would be put up to the competent authority for final
approval. The competent authority for each project will be the same as
applicable for project’s approval by Public Investment Board. Financial bids
are invited after obtaining final approval of the competent authority.
This process is almost continued but now a specialized advisory group from Planning
Commission, Finance Ministry and Department of Legal Affairs is set up for
formulation, appraisal and approval of Public Private Partnership (PPP) projects for
projects of lower costs as below.
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Revised Guidelines for Formulation, Appraisal and Approval of Smaller PPP
Projects:
PPP Highway project Approval process finalized by Department Of Economic

Affairs (DEA) Ministry Of Finance Government Of India as notified vide DEA
notification No. 10/32/2006-inf dated April 2, 2007 is involving larger role of various
Ministries of Government (Inter-ministerial consultations) as earlier but is facilitated
by setting up one composite advisory group.
These revised guidelines are applicable to PPP projects:
(ii) Of all sectors costing more than Rs.100 crores and less than Rs.250 crores
(iii) For NHDP costing Rs.250 crores or more and less than Rs.500 crores when
project documents are as per MCA; specifications are as standardized and
bidding is stated to occur in two stages to incorporate prequalification of
bidders. In case of no confirming these requirements, the project is referred to
PPPAC for all sectors including NH
Thus process of project formulation for smaller PPP projects encircles specialized
advisory group from Planning Commission, Finance Ministry and Department of
Legal Affairs. In fact this is set up of a Standing Finance Committee (SFC) who
scrutinizes very important aspects of bidding documents, mainly financial documents
prepared by MOSRT&H or NHAI. The role of PPPAC is performed by SFC for
smaller projects which is explained hereunder. The memorandum for scrutiny of SFC
includes aspects like: type of PPP (BOT etc.) proposed, estimated cost, necessity of
investment and possible alternatives, project cash flow considering 12% discount rate,
FIRR, EIRR (if available), sources of financing and response of financial institutions,
tariff fixation methods with justification, guarantee and support required from
Government, bidding criteria, method of awarding work, land acquisition and all other
clearances to be required time allowed for achieving financial close, all deviation
from model concession agreement (MCA), O &M aspects of proposed project,
provisions, if any, for mitigating the risk of lower revenue collection, issues of
competing facilities, contingent liability on Government on termination of contract,
dispute resolution mechanism etc. Such an exhaustive list of parameters for appraisal
within five weeks at SFC level or for that matter additional two weeks available at
226
next committee seems inadequate if there are many projects to be appraised at a time.
No wonder if it turns out to be merely a ticking of checklist (YES/NO). The next
stage of appraisal will be evaluation of bidding documents through a committee of
members from Department of Economic Affairs and sponsoring ministry and then
routed to competent authority for accord to investment proposal.
Figure:IV-3
PPP approval process for NH
1. Project
Identification 6. Sponsoring
&Prepare feasibility Ministry
study by (MOSRT&H or
MOSRT&H or NHAI)
NHAI
H.
XT 5. Approval of Competent
2. Formulation of Authority 8. Awarding
project documents (Nine week from receipt of work by
& Circulation to SFC memo) NHAI/
SFC MOSRT&H
XT 4. Committee of
3. Appraisal &
Secretary, Department of Economic
sending memo to
Affairs
NHAI /Ministry
& Secretary of the Ministry
for corrections and
/Department sponsoring the project
then Approval of
approves commercial documents to
SFC
be put for bidding and sends to
(Five week from
competent authority
receipt of ' SFC
(Seven week from receipt of SFC
memo)
memo)
(Derivedfrom notified approval process)
For NH projects costing Rs. 250 crores onwards, route of SFC (cost up to Rs. 500
crores) and route of PPPAC (cost more than Rs. 500 crores) both of them require
around six months to reach the stage of invitation of bids. The PPP approval/appraisal
process as above is seems yet on learning curve and it raises many issues.
227
• The PPP projects are stated to be viewed with due diligence and despite
creation of NHAI, the MCA are published through Planning Commission for
NH works and PPP guidelines are prescribed through Inter-ministerial
consultations. Also, the Ministry of Finance seems playing larger role than
NHAI to see that the projects are taken up under specified uniform framework
with standing commitment of Government. Whether it is SFC or PPPAC, the
term paper of concession agreement and financial viability is ascertained
before putting the project open for bidding. Attempts are made to see that
approvals are given in time bound schedules. If the list of aspects to be
appraised is studied as given under above guidelines, it is exhaustive but not
objective to conclude on comparative merits of taking up of a project. No
bench marking of evaluation criteria is yet done.
• The basic input to any PPP project in Highways would be estimates of capital
costs derived by consultants (as per current practice of NHAI) which are likely
to misguide at appraisal stage. Because, as seen earlier, the estimates of
consultants often turn up unrealistic. A use of point estimates of costs under
appraisal shall be replaced with band of probable costs. Similarly, traffic
counts are vital for sustainability of PPP projects. At present, neither GOI nor
any State Government has reliable traffic counts and forecasts. This is a major
source of project risks and no allowance is applied while appraising the
proposals. For that matter, no risk assessment for any event and deciding on
allowance for them is worked out to check the viability of project.
• These are PPP projects where at least 60% of investment is to flow from
private investors. But the guidelines do not entertain early contractor
involvement for deriving value for money and Public Sector Comparator type
of critical analysis is not accommodated before putting the project on PPP
route. Under Early Contractor Involvement (ECI) award, the successful
contractor prepares a preliminary cost estimate. This gives an early indication
of potential problems in the scheme and its estimates. ECI is basically a
partnering approach in which the contractor is appointed at an early stage of
project development to assist in planning, assessing buildability and cost
estimating in advance of route development and the statutory process. The
228
contractor is then incentivised to design and construct the scheme within an
agreed Target Price, based on a pain/gain share formula (Nichols 2007).
The Public Sector Comparator compares the NPV of the concessionaire’s

proposal with the traditional cost of design, construction, maintenance, and
operation in the traditional method. It is thus useful in comparing PPP
proposals for various bidders and also for comparing with traditional mode of
state execution. GOI seems to accord the project approvals on standardized
fashion to avoid delays. But that method may not attract bidders especially on
moderate return projects and the private investment may remain limited as
seen so far. The short listing of bidders shall be done on project specific
documents so that decision to go for PPP is meticulously derived.
• The whole process seems ascertaining cost of these projects to the public
money (subject to maximum 40%) and roughly estimating financial viability
(for private investment of minimum 60%) of the projects. Once SFC/PPPAC
has approved the project, remaining committees generally approve the
proposal after verifying remaining limited aspects. Then NHAI will simply go
for invitation of bids on prescribed formats and will award the work based on
comparative offers on predefined bid criteria. No post approval examination of
outcome is seen required as per guidelines. If a highway project is approved
through above process and there are no takers, the above exercise is not
helping to see why the bidders are not attracted for investments.
• Most importantly, what is PPP concept in above modalities? The Government

thinks that this road shall be developed /widened with prescribed standards
and investors will receive returns as per number of various types of users of
the facility. The feasibility is ascertained based upon consultant’s reports. The
bidding criterion is mostly single, i.e. toll period offered or minimum cost to
Government. But it does not allow a private investor to choose his way any
alignment and setting up of business terms to suit the case to case basis
realities. In feet this is the biggest inhibiting regulation in formulating a PPP
project.
• The above guidelines do not embed full-fledged service standards (lane

availability, level of congestion, reduction in accidents etc.) as a basis of
229
project formulation. This is an emerging practice in UK & Europe. Hence
congestion problems are likely to surface in future for such projects.
Strangely, Private Sector Participation projects are labeled by Government as

PPP projects but role of partners are not accentuated in above approval
process. The Government is treating the PPP project just as a private toll road
project with view to transfer all pain & gain to private investors. Logically
when both partners carry diverging interests (Governments supposedly
working for public interests and private for profits), the partnership deed shall
be explicit and role of Government can not be limited to supplying land and
offering subsidy for reducing cost of project to private investors. In above
process of PPP project formulation, role of Government is not proactive. Once
viability of project is assessed by Government it simply checks commitment
of public funds (like cash contracts) and possibility of legal problems as seen
in above procedure. But success of project in implementation is not assessed at
any stage and not covered under concession agreement.
The PPP approval process standardized by GOI is put up against guiding

questions listed by Prieto(2005) for PPP from contractor’s perspective in US.
This assessment explains the taste of Indian PPP for NH and is found too
simplified on the line of public goods. Some important questions are yet to be
replied from concession agreement.
230
Table: IV-24
Driving Factors for Investors in PPP for Highways
Sr. Driving Questions sought by Answers derived from GOI practices for
No. investors for Success of PPP as NHDP
per Prieto (2005)
1 Does political will exist? Yes. It is over & above enabling legislation.
2 Does a potential project exist? Yes. Feasibility is assessed before bidding
is opened. As far NHDP is concerned, now
Phase-Ill, V &VI are on anvil and all are
carrying heavy traffic. Remarkable is,
Phase-I consisted of such attractive traffic
potential but meager PPP was achieved.
Since, no reports of non responsive bidding
for private investments are found,
presumably, Government did not go for
PPP rigorously. Also, though the PPP will
incorporate private partner with commercial
interests, Government is not promoting any
project on commercial basis for itself and
hence aspects like pre- marketing and
marketing are missing. Hence, there may be
a chance, good projects may be pushed
through cash contracts in want of private
bidders.
3 Will stakeholders support the GOI has many successfully operating
project? projects under NHDP. So, presently
stakeholders do support such projects with
little exception. However, issues like land
acquisition, utility shifting, environmental
regulations, delivery and contracting
method, right to toll, access to other
revenue mechanisms are needed to be
assessed by bidders before putting a bid.
4 Are there any fatal flaws? The Government is solely depending on
Model Concession Agreement (MCA) for
PPP and it is on learning curve. As
discussed later, though no major flaws as
such are observed from investor perspective
but existing incomplete contract conditions
can lead to disputes.
5 Will it make financial sense? Regarding financial format, Government it
self was never able to produce financially
sensible projects for itself and now the PPP
231
Sr. Driving Questions sought by Answers derived from GOI practices for
No. investors for Success of PPP as NHDP
per Prieto (2005)
process evaluates financial viability on
Government’s terms and that may suggest
need for own assessment from bidders.
Issues like subsidies and concession fees
etc. are part of concessions but reach to
financial markets is exogenous factor where
an individual will have different scope.
Unlike US tax exempt funds are not yet
available in India for infrastructure projects
on wider scale.
6 Is the regulatory framework There is no regulator for highway sector
well designed? and it can be adverse for bidders in case of
incomplete contract clauses. Here, pricing
is pegged to savings to facility users and
savings is derived from per km cost of
running a vehicle. Since many of times
distance is not saved, this criterion may
hamper support of stakeholders if no
explicit saving is perceived by users. In
UK, pricing is pegged to service standards
and hence varies on scale. In India variable
pricing regulation is non existent.
7 Can we close it? The exit clauses for investors are not
explored well under MCA except relief on
debt obligation in case of unforeseen
events. The exit aspect for sustainable
financing of PPP is not well defined which
we may see for any deep discount bond
offer for similar period (e.g. refinancing
options).
(Source: Based on Prieto(2005) andGOI practices in NH segment)
4.11 CONCLUSIONS:
The NHDP is India’s most ambitious programme for development and maintenance
of National Highways and Expressways (i.e. superior roads) which was flagged off on
January 2, 1999. The NH being trend setter for other category of roads, study of
NHDP is useful in understanding sectoral policy perspective and issues in
development of roads. Like US financing Interstate Highways, India has started
232
NHDP mainly financed from enhanced user charges like fuel cess. For
implementation of NHDP, a specialist highway agency (NHAI) is created which is
deliberately provided with thin structure (somewhat similar to Highway Agency of
UK) for adopting outsourcing based operations meanwhile respective State PWDs
(traditional body for constructing and maintaining NH at behest of MOSRT&H) are
divested of the NH stretches covered under NHDP. Knowing the paucity of public
funds and no further possibility to enhance user charges, private sector participation
on financial front is accepted as only recourse. Despite rhetoric support to PPP route,
NHAI has not really realized more than 10% of investment in recently completed
Golden Quadrilateral (GQ) under Phase-I from private sector. The GQ is the only
portion completed by NHAI under NHDP so far in last eight years. This private
investment has been found on piecemeal basis (like Spain and Mexico) where
commercial viability was evident and hence, there is faster development on busy
corridor like National Highway N0.-8 (Delhi- Mumbai corridor). But on such busy
corridor also, development has been on piecemeal basis. The most striking fact is,
famous Golden Quadrilateral network under the Phase-I took more than double time
for completion with substantial cost overrun. The GQ was to be implemented under
established and favourable conditions whereas Phase-II is to be implemented under
greenfield conditions. Despite slow progress in Phase-I and II, the original scope of
14234 km under Phase-I and II is expanded to 51834 km that is almost four times
expansion of NHDP. Due to recent thrust for PPP, Government has expected NHAI to
take up all the investment from Phase-III onwards on BOT basis which is
unprecedented even on international scale. The Government has prepared Model
Concession Agreement for PPP projects and has structured route of approval of PPP
projects forming a Committee of members from various Ministry. But Government
has no plans to rationalize levies on road users in lieu of toll payments to BOT
operators. To induce tolling culture, Government has already implemented perpetual
tolling of four lane NH and major permanent structures on NH. The poor rate of
progress in NHDP and commercial unattractiveness of many stretches selected under
NHDP raise many doubts for actual response from private sector for investment in
NH development. If the National Highways (despite being commercially recognized
category of roads) are not able to attract private funds under a nationally declared
programme, adoption of PPP for next hierarchy of roads seems discouraging. Hence,
233
financing of roads in India in coming days is going to continue from public funds
only.
Following conclusions are made from study of Indian scenario of development of NH

segment..
found of village road standards. The commercial importance of NH in overall
economy has compelled planners to upgrade NH stock mainly through four
lanning works under special programme namely NHDP.
2. The private sector participation in PPP form is asserted by Government by
amending NH Act in 1995 for allowing concession to any person. The
highway financing is basically matter of matching financial terms for the long
term gestation period of heavy upfront capital investments with steady current
receipts from user charges which may be backed up by budgetary support like
grant to the BOT operator or cess and other budgetary allocations if NHAI or
any public agency invites financing. The Task Force on infrastructure (1998)
had anticipated financing of NHDP based on access to long term institutional
finance like commercial banks, insurance and provident funds which were
supposed to have matching terms of repayment with road project and were in
need of stable source of returns for long time. The repayment to such
institution was estimated to come from cess and other user charges (including
tolls) and in this concept the private sector equity was estimated only around
10%. In reality, no such leverage is enabled either by NHAI or through private
investors under BOT projects. So for the users charges collected on current
receipt basis are directly employed to pay the capital expenditure of
contractors under cash contracts. This mechanism has not produced sufficient
output where deficient executive capacity of NHAI has also played major role.
234
Since the production of tollable four lane got slow, it directly affected the
inflow of toll income and hence the current receipt under cess got under sever
pressure to see the cess reaching level of Rs. 2.0 per liter of petrol and diesel.
3. In fact NHAI managed to raise long term debts in terms of capital gain bonds
but hinds were found mismanaged since the actual progress could not absorb
these funds on capital account.
4. Since borrowing for NHDP is like Sovereign debt (owing to outright
guarantee by GOI) and hence GOI has limited extent of borrowing to the
extent of anticipated current receipts from users charges (cess, tolls etc.) and it
is expected that private sector shall invest own equity and debt funds under
BOT projects from NHDP Phase III onwards for next eight years starting up to
year 2015. Here also, going through various reports on NHDP, Government is
not found committed to sheer BOT mode and public financing of NHDP on
larger scale in terms of cash contracts is felt going to be mainstay for NHAI.
For realization of such leverages, yet no financial market is established and
investment in roads has remained a lumpy investment. A supportive financial
market for financing and refinancing of such investment leveraged on current
receipts of project is required (like primary and secondary mortgage markets
in housing loans) irrespective of type of player involved i.e. public player like
companies to tap these long term resources with the help of GOI based on
leverage on project revenues (and cess support). For example France has done
this and divested public investment at proper stage from such toll companies.
The pooling of NHDP inflow at national or such large scale can help in
ascertaining financial viability of long term finance gathered from financial
institutions. Otherwise scattered type of present PPP will be limited to
attractive stretches and are susceptible to viability concern (as found in case of
Mexico and Spain). Alternatively, large private consortium if handles many
stretches bundled from viability perspective, the overall spread of PPP may get
penetration into greenfield conditions. This level of private financing of
highways may require foreign investment which was arranged by China by
linking the PPP projects to capital market. Ail these mean, basically creation
of proper financial market which was contemplated by Task Force (1998) in
235
the terms of operation of IDFC. But the present scenario is limited to awarding
concession for attractive stretches on Build-Operate -Transfer basis and NHAI
awarding cash contracts to the maximum extent possible under given public
resources.
traditional players like State PWDs. If the' supervision is to be outsourced then
6. In fact in whole approach to NHDP tends not to expose the field to the market
at larger scale. The PPP route envisaged through MCA is an attempt to
regulate the natural monopoly conferred upon to BOT concessionaire to
control superfluous profits but it has no jurisdiction to foster PPP by linking
the project with market. The MCA calls it leveraging over public funds (cost
sharing in terms of grant support) to attract private investments. But
leveraging on equity funds or toll revenue to involve cheaper debt resources in
a BOT project is not attended in this MCA. Hence, the approach for PPP is a
piecemeal approach that can not meet expected investments under NHDP. If
the NHDP is going to depend upon budgetary allocations like public
financing, the sustainability of NHDP and NHAI is vulnerable. The tenure of
NHDP so far is very short as compared to US and China who required two
decades or more to construct the system of superior roads. Hence, NHDP can
be taken up cautiously applying corridor approach or package of many routes
so that field on wider scale is exposed to market forces and competition for
field is materialized in case of natural monopoly conditions.
partner in this process who can carry lessons to their jurisdiction of remaining
236
State level (for State roads), NHAI shall atleast involve State PWDs in then-
8. The steps taken by Government in terms of implementation of MCA and
provision of priority route of investment approval are aimed in facilitating PPP
but as seen in relevant subsections, they are not focused to large scale private
sector participation. Present delivery system under non PPP route is not
efficient and need project level careful estimation and design of projects
through responsible consultants if outsourcing is opted for. The consultants
shall be made responsible in their performance for effective outcome in non
PPP route.
This Chapter discussed in detail the initiatives taken in India for PPP, establishment of
NHAI, Private Sector Participation other than PPP, importance of State PWD and
status of NH development. In the next Chapter, an attempt is made to analyze the
four case studies of Public Private Partnership.
Endnotes:
1. The above categories do not include urban roads within a city which are
managed by respective urban authorities. The updates of tabulated data are
available at internet website:www.nhai.org
2. Government of India constituted an expert group in October 1994 under the
chairmanship of Mr. Rakesh Mohan, Director General, National Council of
Applied Economic Research to give suggestions for commercializing
infrastructure. The Rakesh Mohan report is very basis of many onwards
decisions by Central Government.
3. The government of the Philippines created a novel institutional structure to
support the country's large private infrastructure program under the 1989 BOT
Law and Regulations. There is a “BOT centre” and down the line each
Sectoral agency has a specialist "BOT Unit" responsible for marketing,
237
coordinating the design and implementation of its projects. National,
provincial, and municipal authorities select and award projects under the
framework. The BOT law also helped in taking up many unsolicited new
concept based BOT projects in Philippines but subject to condition that no
guarantee, equity or subsidy are directly required from Government. Indian
planners are not really keen for PPP ab initio. Hence, Philippines approach is
too bold for Indian context.
4. US have seen past fifty years of Interstate highway financing using mainly user
charges like fuel taxes under “pay as you go” concept. For raising debts, States in
US may issue debt backed by anticipated federal grants [known as GARVEEs
(Grant Anticipation Revenue Vehicles)], and federal law provides for the creation
of state infrastructure banks (SIBs), revolving funds capitalized partially with
federal grants that states and local governments can borrow from for highway
construction.
5. The Department of War Transport was established that time to look after
major ports, railways, road and water transport, petrol rationing, etc. The
function of the department was broadly to coordinate the demand for all
modes of transport during the Second World War. In 1957, the department
was named as the Department of Transport, and placed in the Ministry of
Transport and Communications. Since then the department has seen many
changes in its name and variations in the scope. Now the Ministry sees a need
to rationalize its scope for N.H. works in view of expanding role of NHAI.
6. NHAI was set up under “The National Highways Authority of India Act,
1988” and it became operational in February 1995 when 5 ADB funded
projects (331 km) costing about Rs.800 crores in 5 States viz., Haryana,
Rajasthan, Bihar, West Bengal and Andhra Pradesh were entrusted to it.
7. The audit was done on selected 32 stretches spread over 12 States and covered 21
Project Implementation Units (on site presence of NHAI) with total contract value
of Rs.4,508 crores (15 per cent of Rs.30,300 crores, the estimated cost of NHDP,
Phase-I).These 32 samples included 21 completed stretches executed by NHAI,
(GQ=13 stretches, NSEW = eight stretches) and 11 ongoing works (where the
physical progress was 50 per cent or more) (GQ = nine stretches, NSEW = two
stretches). The CAG audit is limited for other than BOT projects.
8. These documents are available on GOI portal: www.infrastructm-e.gov.in.
238
REFERENCES
Basu, S.B. (2007):Presentation on NHDP By Chief Engineer (Planning &

Monitoring), Department of Road Transport & Highways (Roads Wing) Ministry of
Shipping, Road Transport & Highways, Government of India
(www.unescap.org/ttdw/common/TIS/AH/files/Investment_Fomm2007/India__pr esentation.p
df accessed through Google on date 12-7-07)
CAG (2002-03): Remarks on Works Expenditure for Roads and Building

Department of Government of Gujarat By Comptroller and Auditor General of
India available on www.cag.nic.in/states/gujarat/civil/chapter4.htm last accessed on date
25-4-07)
CAG (2005): Report No.7 of 2005 (PSUs) Comptroller and Auditor General of India
Audit Report for PSU (www.cag.gov.in/reports/commercial/2005_7/l-Preface.pdf last
Government of India Report (2005): National Road Transport Policy Document

(2005) available on National Portal of India: Business: Infrastructure: Roadways
(Available on www. india.gov.in last accessed on 21-7-07)
Government of India Report (2006): Report of the Core Group on Financing of the
National Highway Development Programme Planning Commission New Delhi,
(Available on www.infrastructure.gov.in last accessed on 21-7-07)
Government of India (2007):Report Of The Working Group On Roads (2007-

2012) For 11th Five Year Plan - Ministry Of Shipping, Road Transport And
India Document
Economic Survey 92-93: Infrastructure Ministry of Finance, Government of India

(http://indiabudget.nic.in last accessed on 12-3-08)


239
Economic Survey 98-99: Ministry of Finance, Government of India


Eleventh Five Year Plan Document (2007-2012) : Planning Commission, GOI

(planningcommission.nic.in/plans/planrel/fiveyr/welcome.html last accessed on date 12-5-
08)
Award :WorId Bank Technical Paper No. 399 Finance, Private Sector, and
Infrastructure Network (http://www.worldbardc.org accessed on net dated 25-4-07)
MCA (1999): Model Concession Agreement issued by MOSRT&H For National

Highways, Government of India
MCA (2006): Public Private Partnership in Highways Model Concession

Agreement issued by Planning Commission, Government of India
Mohan (1996): Rakesh Mohan Committee Report On Roadways compiled and

MOSRT&H Report (2003): Rationalisation of The Functions, Activities And

Structure Of The Ministry Of Road Transport And Highways Government of
India (www.expenditurereforms.nic.in/trans9.pdflast accessed on 25-8-07)
MOSRT&H (2007):, Annual Report 2006-2007 Ministry of Shipping, Road

Transport and Highways Department Of Road Transport And Highways, Government
Of India Document

State for Transport, UK (www.dft.gov.uk/pgr/roads/nicholsreport/nicholsreport last
240
Ninth Five Year Plan Document (1997-2002) : Planning Commission, GOI
(plaimingcommission.nic.in/plans/planrel/fiveyr/welcome.html last accessed on date 12-5-
08)
Parliament of India (2003): Sixty Seventh Report On Demands For Grants (2003-
2004) (Demand No. 76) Of Ministry Of Road Transport & Highways presented on
10-4-03 to Department-Related Parliamentary Standing Committee On Transport,
Tourism & Culture, Rajya Sabha & Lok Sabha ( through www.india.gov.in last
Prieto, Bob (2005): PPPs: A Contractor/Developer’s “How To” Guide Paper No.:
AV20050423-009 -- NCPPP Paper.doc (10/10/05) accessed on www.google.com on
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Highway and Transportation Officials (AASHTO)
(Available on www.pavementpreservation.org/publications/getfile.php?journal_id=841 last

241
CHAPTER-V
TOLL PROJECTS FOR ROAD SECTOR IN INDIA:
CASE STUDIES
5.1 INTRODUCTION
SECTION-I: BACKGROUND FOR CASE STUDIES
5.2 DESIGN OF CONCESSIONS AND BIDDING CRITERIA FOR BOT

PROJECTS
5.2.1 Cash Flow Estimation While Bidding For BOT Road Project
5.2.2 BOT Concession Designs
5.2.3 Bidding Criterion for BOT Concession
5.3 SELECTION OF BOT PROJECTS FOR CASE STUDY
SECTION-IJ: DISCUSSION AND ANALYSIS OF CASE STUDIES
5.4 CASE-1: CONSTRUCTION OF FOUR LANE ROAD OVER BRIDGE

IN LIEU OF LEVEL CROSSING NEAR VILLAGE
CHALTHAN ON NH NO.-8
5.4.1 Project Background
5.4.2 Main Aspects of Concession Agreement
( 5.4.3 Actual Operations and Issues
5.4.4 Policy Implications from Case Study
5.5 CASE-2: CONSTRUCTION OF DELHI-NOIDA TOLL BRIDGE IN

NOIDA (UTTAR PRADESH STATE)
5.5.1 Project Background and Formulation
242
5.5.2 Project Details
5.5.3 Actual Operations and Issues
5.6 CASE-3: CONSTRUCTION OF FOUR LANE VADODARA -HALOL

ROAD SH NO.-87 WITH ACCESS CONTROL DIVIDED
CARRIAGE AND SERVICE ROADS KM 8/300 TO 40/00
5.7 CASE-4: CONSTRUCTION OF ADDITIONAL TWO LANE BRIDGE

ACROSS RIVER NARMADA WITH APPROACHES ON NH
NO.-8 KM 192/0 TO 198/0
SECTION-III: PRIVATE PROJECT FINANCING ASPECTS
5.8 PRIVATE PROJECT FINANCING ASPECTS IN CONCESSION

DESIGNS
5.9 CONCLUSIONS
243
\
CHAPTER-V
TOLL PROJECTS FOR ROAD SECTOR IN INDIA:
CASE STUDIES
5.1 INTRODUCTION:
It is evident that PPPs are attracting Governments world over as an off government
balance sheet provider of infrastructure by means of allocating construction risk and
demand risk to the private sector. BOT (Toll) types of concession agreements are
flourishing in India and overseas with variations. The road ministry is no more
“spending ministry” and it is now facilitating private investment in infrastructure
building. But PPPs are only a part of the financial toolbox, not a panacea to address
the extensive needs of Central, State and local governments since the private partner
will come into play only when profits are evident. The PPP market exists on the
recognition that the Government and private sector each have different relative
strengths and motivations. The Government stresses timely service delivery and seeks
to balance financial and non-fmancial (economic) measures of success. The private
sector is profit and efficiency-oriented with the goal of delivering superior customer
service and maximizing shareholder value. The private-sector interests are aligned
with public-sector goals through market incentives in terms of concession agreement.
The PPP route is in fact guided by concession agreements. In the transition from “Do
every thing” to “Do nothing” scenario, role of planners is expected to design
concession agreements in such a way profit incentive remains but does not overpower
public concern of Government. Straightway, if balance is not plausible, Government
shall produce the public goods traditionally.
This chapter is devoted to actual implementation of concession agreements in PPP

projects taking case studies in subsequent sections. Before reaching to actual case
studies, issues related with concession designs for BOT (for simplicity, BOT term is
considered in general to imply toll based except specified) are discussed in early
subsections. The whole chapter is divided into three sections: Section-I (Background
For Case Studies); Section-II (Discussion And Analysis Of Case Studies) and
Section-Ill (Private Project Financing Aspects) and is presented below.
244
SECTION-!: BACKGROUND FOR CASE STUDIES
5.2 DESIGN OF CONCESSIONS AND BIDDING CRITERIA FOR BOT

PROJECTS:
BOT projects are generically different than traditional cash contracts. In a cash
contract, the bidders bid for lowest cost under given project conditions. The public
authority pays the contractor as the work progresses (mostly monthly progress basis)
and the payment is practically done full when the construction is completed. Hence,
material/labour suppliers to the contractor do not demand interest and wait till the
contractor gets monthly payments. The tenure of construction period is on average
two to three years and the contractor invests & recoups on monthly basis within this
limited period. Thus practically a well equipped contractor bears no financial risks
and is not accounting interest during construction. During such short period, inflation
based escalation of input material/labour is assured under contract. The only worries
of contractor are time overrun and cost overruns due to himself as compared to his
offer price for that project and thus viability of such projects is basically under
purview of prudent practices of civil engineering. Due to lowest risks and established
practices, the open competition among the contractors (competition within the field)
controls the profit and keeps around 10 % to 20%. The public body has strong reliable
database of estimated cost of such works and that helps in curbing contractor’s profits
to modest levels as above. The situation under BOT is very different as payment for
work done is not only delayed but also linked to demand from users under specified
monopolistic concession agreement. The tenure of BOT projects could be generally
around 10 to 30 years and recovery of cost incurred with expected returns over such
long period is beyond purview of established civil engineering practices. When a
bidder will bid for BOT project, his set of assumptions will be quite different than
cash contract.
5.2.1 Cash Flow Estimation While Bidding For BOT Road Project:
A BOT road project will generate a stream of cash flow over its construction and toll
period which will typically involve huge upfront cost for construction of facility and
then yearly maintenance cost (including day to day maintenance and periodic repairs,
toll collection expenses, maintenance of utility services at project site etc. collectively
245
termed as O&M cost) as a cash out flow. The cash inflow starts once the facility is
constructed and put to commercial operations. The revenue from tolling the users will
depend on day to day traffic volume and applicable toll rates. The investor’s decision
for debt and equity ratio will decide cost of funds and hence desirable discount rate
for future stream of cash flow.
As far as construction cost is concerned, bidder shall have same assumptions like cash
contract. But for revenues, the day to day traffic volume and applicable toll rates will
decide the future revenues. The traffic volume generally considered to be reflection of
State or national economy, and will also depend upon future division (among
alternative routes or modal division between alternatives to road transport) and
diversion of traffic. Thus traffic factor will be most uncertain parameter to be assumed
by the bidder. The problem is aggravated by practically non existent reliable traffic
census figures for past years at the point of proposed toll plaza. Notwithstanding all
limitations, a bidder shall estimate future cash flow and use suitable method to arrive
at investment decision at bidding stage.
Standard financial practice uses Discounted Cash Flow (DCF) technique (Pandey
1995). It is considered to be most sophisticated technique for evaluating investment
decision and it is not based on operating profit. The DCF technique will require
evaluating basically three components: initial investment; annual net cash flow during
toll operations and terminal cash flow as per provision of concession agreement.
Initial investments(C0): This is the cost of mobilizing on the site and procuring
plants and equipments (which is generally assumed to be maximuml5% of likely civil
cost of project) and actual construction cost attributed from payment to a
subcontractor on the basis of EPC contract or paying for factor costs of material,
labour, and services from consultants. The estimation of initial investment will require
some assumptions.
Assumption:
1) After arriving at total civil cost of proposed project, bidder may assume
suitable debt/equity ratio. For estimation purposes expenses are assumed uniformly
spread over construction period.
246
2) The working capital adjustments during construction period is assumed to be
internalized due to provision of contingency provision in estimating civil cost of the
project and interest during construction (IDC) may be assumed at market rate for
outstanding debt.
3) The sum of 1) & 2) above is termed as C0 for cash flow purpose.
Annual Net Cash Flow during Toll Operations:
These are difference between cash receipts and cash payments including taxes. The
cash receipts are purely attributed from toll revenues collected from users of the
facility. The cash payments are attributed to routine and special repairs, payments for
utility services .& security services, toll collection charges, insurances etc. This shall
be calculated on after- tax basis, as prescribed by standard practices. Following
assumptions are made in deriving annual NCF.
1) Using either own traffic survey or Government traffic census, the base traffic
is considered in terms of tollable category of vehicles per day (up and down total) at
the bidding stage and appropriate natural growth of traffic over the construction
period and toll period is assumed. MOSRT&H has published capping rates of tolls
which shall be indexed to WPI for year to year toll rates. This will give cash receipts
for tolling years. If the concession allow toll rates of choice, bidder may take suitable
decision to arrive at yearwise applicable toll rate based on actual benefits reaching to
users in terms of savings in vehicle operating cost and travel time.
2) Keeping in view the tax holidays offered by the Government & applicable
Minimum Alternative Tax (MAT), the tax for all years of operation with depreciation
shield may be worked out to arrive at net tax payable.
3) As an interest excluding principle, interest payable is internalized while

discounting the cash flow with suitable discount factor. Hence, interest payment on
debt is not derived for net cash flow.
4) In addition to initial investment as above, the road/bridge project may require

some reinvestment of cash flow. Since this expenditure is for maintaining revenue
247
generating capacity of asset, it is considered to be cash outflow for additional capital
expenditure for repairs and rehabilitation.
5) Toll collection is generally given on subcontract at 2% of toll collected.

Adding for payments for utilities, security services, insurances @ 1% of toll collected,
thus 3% of toll collected will be like variable cost of operations.
6) Revenue collected under 1) minus total payments under 4) & 5) will give
yearwise NCF estimation. The adjustments required in working capital will not be
applicable here because the receipts and expenses are purely in cash form in toll
projects.
The standard financial practice (Pandey 1995) defines for discounting purpose NCF=
EBIT (1-T) + DEP - NWC - CAPEX which will be merely
Revenues-Maintenance-Operation cots for BOT project.
(Where, NCF= Net Cash Flow; EBIT= Earning Before Interest and Tax; T= Tax Rate;
DEP= Depreciation; NWC= Net Working Capital and CAPEX= Capital Expenditure.)
Terminal Cash flows:
This comprises of Salvage value (SV) that is market price of the investment at the
time of its sale. The BOT toll projects stipulate handing over the facility to
Government free of cost and hence the SV will be zero in this case. Another form of
terminal cash flow is release of net working capital which is not applicable to toll
projects here as explained in above paragraph. Hence, this component of cash flow
will be zero for BOT based toll projects.
Now, summing up of Annual net cash flow during toll operations & Terminal Cash
flow (generally zero for BOT projects) will provide year wise net cash flows for toll
period (say 15 years) and it is termed as Ci, C2, C3, C4......... C15.
The NPV is found by discounting Ci to C15 at predetermined discount rate (k) and
algebraically summing of disco unted value of Ci to C15 and C0. Thus,
NPV= {Cj/(l+k) + C2/(l+k)2+C3/(l+k)3 +......... + Cis/(l+k),s}-C0.
248
Here, k is opportunity cost of capital which is not a straight forward assumption for a
BOT project. If a firm is allowed to earn 10% profit on a cash contract of one year
duration, the opportunity cost of holding up for 15 years can be varying for all the
bidders. It is not the only time period, but risk of loss of revenues due to traffic
division or diversion and like any industry, macro economic factors bother the
investors to think of higher rate of discount. More importantly, the friction with
facility users may not be acceptable to cash contract contractors. Hence, BOT
concessionaire will demand some premium (may be 2% to 3%) over market rate of
borrowing.
The DCF technique also provides important tool named Internal Rate of Return (IRR)
by equating NPV with zero. When NPV is zero, the corresponding rate of discount is
called IRR. Alternatively a bidder may check his bidding proposal for possible IRR
under his set of assumptions. Under crude approximation, a bidder may equate cash
out flow and inflow for each year of concession period and he may calculate every
year interest over unrecovered project cost as cash out flow. This may give quick
estimate of payback period while bidding for shortest concession period.
Thus bidder is estimating a lot over and above cash contracts which is beyond
purview of established civil engineering practices. Most importantly he is in need of
estimates of time value of investment that was not required under cash contract.
Conversely, the public body designs concessions based on same mathematics to be
exercised by bidder.
5.2.2 BOT Concession Designs:
The design of concession for infrastructure is found based on either Rate of Return
regulation or on Price Cap (here it is toll cap) basis (Kerf et al. 1998). In case of Rate
of Return regulation, it ties the revenues of a utility to its costs, measured as expenses
(operating expenses, depreciation, and taxes) plus the return on the capital committed
to its operations. Here objective is to limit the utility's revenues so that it is able to
recover its expenses and to earn a specified rate of return on its invested capital.
Theoretically, the prices shall be varied to maintain the specified rate of return. The
second way of designing a concession is found under Price Cap regulation. Instead of
limiting the operator's revenues to restrict him to specified rate of return on its
249
investment, the regulator fixes the ceiling on price that can be charged for long
periods of time according to a formula that takes into account future inflation and
future efficiency gains expected from the utility. As noted under chapter-IV, all NH
are tolled at specified toll rate after four lanning, hence the Price Cap regulation is the
basis of concession design for NH. However, some unsolicited PPP proposals are also
accepted mainly on State highways under Rate of Return regulations where toll period
is ending on attaining the agreed rate of return on investments made in the project.
Due to assured returns, concessionaire has lowest incentive to attract traffic or to
achieve efficient expenditure pattern and hence not favoured by planners. Also, the
main issue in Rate of Return regulation is about ascertaining actual expenses and
revenues for arriving at actual rate of return achieved in an accounting year. In case of
Price Cap the case is simplified. The revenues and returns are unrestricted and hence,
a concessionaire either earns heavily or loses badly thus raising the issue of viability.
Hence, traffic, guarantees, capital grants (equity support) revenue shortfall loans and
revenue sharing (negative grants and increasing annual concession fee to be paid by
concessionaire) kind of clauses are required in the concession agreement for
sustainability and reasonability of Price Cap based projects.
5.2.3 Bidding Criterion for BOT Concession:
After deciding on type of regulation, second major aspect in granting of concession is

related to bidding for concession rights. Since, Rate Of Return based concession
agreements are generally unsolicited, competitive bidding and hence bidding criteria
are out of scope in their design. The definition of project cost to be recovered and
expected rate of return being main factors of such agreements, theoretically, bidding
could be made for lowest rate of return and/or lowest cost of project.
For Price Cap projects, bidding has been traditionally invited for shortest concession
period. The public authority is least bothered for project cost as the concession
agreement is not providing assurance on recovery of investments or returns. Under a
typical BOT project for construction of road/bridge, the bidder (who is potential
investor) is asked to quote or offer concession period (which includes construction
period) just sufficient to earn him desired rate of return and project is awarded to the
bidder offering shortest concession period. The bidder will estimate concession period
adequate to ensure positive NPV for his desired discount rate as compared to
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alternative investment opportunities. Alternatively, he will bid for concessipp'period
till he assures IRR of proposed investment equals his required rate of returhi^vither:.
MOSRT&H and State Governments have been practicing Price Cap regulation with
bidding criterion of concession period.
Since 1999, NHAI has switched over to concession agreements with fixed toll period
but bidder shall bid for capital grant required or negative grant to be offered to NHAI
and lowest cost to NHAI shall win the award. For a given scope of a project, if the
traffic is strong enough, bidders will like to offer shorter concession period if that is
the criterion or in case of fixed concession period, bidders will tend to offer negative
grant if that is the criterion. Alternatively, if a project has weak potential of revenue
generation, bidders will like to quote higher concession period if that is the criterion
or in case of fixed concession period, bidders will demand more capital grant if that is
the criterion. By fixing the concession period beforehand, public authority is
attempting to control the revenue stream and bidder is asked to check up the project
cost that he could invest for given revenue stream. The excess of return over
investment shall become negative grant and deficit shall be capital grant and public
authority is serious about definition of project cost. Broadly it can be seen that
keeping fix concession period is like getting closer to fixed Rate of Return regulation.
The problem is, in case of untoward incident, concessionaire is compensated in terms
of extension of toll period and not in cash terms which is like distorting the proximity
with Rate of Return regulation.
Presently, NHAI and other Government agencies are using these bidding criteria in
discrim inatorily. Hence, a bidder can come across any of these criteria while bidding
for BOT project. Since the longer toll period means prolonged responsibility of O&M
and diminishing present value of revenue with increase in time, for a project with
weak revenue potential, bidder will prefer to invest less by means of capital grant
demand than opting for longer toll period. On the contrary for a project with strong
revenue potential, bidder will like to offer shorter concession period than opting for
upfront negative grant to public authority. Risk wise, longer concession period and
negative grant option will be distractive for bidder. Thus for a bidder, the choice
among available options of bidding criterion (concession period based or plus/minus
capital grant based bidding) will depend upon project characteristics. Regardless of
bidding criterion once the project is awarded, all the three facets of Concession
agreement namely- Private concessionaire, Government and Road users (Public) have
the same operational characteristics. The operational characteristics in fact do not
differ for type of regulation being followed if estimated parameters are actually
realized. Similarly, since a public authority has negligent role in a BOT project, the
operational aspects are same for NHAI/MOSRT&H or State Government projects.
Keeping in view above discussed aspects of concession design, following case studies
are selected for this study that is mainly guided by type of regulation being followed.
Of course, access to project details respecting commercial confidentiality of projects
also governs the selection of case studies.
5.3 SELECTION OF BOT PROJECTS FOR CASE STUDY:
As a population, 25 BOT projects by MOSRT&H and 55 BOT projects by NHAI

and thus 70 projects are so far awarded in NH segment during last decade but more
than half of them are yet to get in to operation stage or has just begun to collect tolls
(Paragraph 4.8.5 Chapter-IV). Hence, effective population is around 35 projects for
NH segment. The BOT statistics at State level is yet not officially available but can
not be more than twenty as found from discussion with officials in this field. Gujarat
State has completed five projects on BOT basis on State Highways out of which four
are under tolling and one has completed the tolling stage. Except few projects (mainly
by IL&FS), almost all projects on NH and State Highways are based on Price Cap
regulation.
Under this back ground, four case studies are selected in this chapter. Two of them are
for National Highways (based on Price Cap regulation) and remaining two case
studies are on State Highways (based on rate of return regulation). The case studies
start with one of the first batch of BOT projects(l 995-1996) undertaken by
MOSRT&H and ends with recent case study on NH explaining evolution of more
elaborative concession agreements and related issues. The concession agreements
based on rate of return regulation are designed by Infrastructure Leasing & Financial
Services (IL&FS) and are pioneering work when private investment at institutional
level was difficult to visualize. For example, the Delhi- NOIDA Toll Bridge project
by IL&FS was taken up on PPP basis in 1992 before any NH project on PPP basis
was talked about.
252
The four projects under case study are as follow:
Casel: Construction Of Four Lane Road Over Bridge In Lieu Of Level

Crossing Near Village Chalthan On NH N0.-8 in Gujarat State
(Chalthan project)
Case 2: Construction of Delhi -NOIDA Toll Bridge in NOIDA (UP State)-

IL&FS project ( NOIDA Project)
Case 3: Construction Of Four Lane Vadodara -Halol Road SH No.-87 with

access control divided carriage and Service roads km 8/300 to 40/00 IN
Gujarat State- IL&FS project (Vadodara- Halol project)
Case 4: Construction Of Additional Two Lane Bridge Across River Narmada

With Approaches on NH N0.-8 km 192/0 to 198/0 in Gujarat State
(NICE project)
For all of them, important aspects of BOT project-the project back

ground/formulation, provision in concession agreement, actual operations and
financial viability are studied and relevant issues are discussed. The case studies are
evenly divided in to Rate Of Return base regulations and Price Cap regulations. The
broad objective of this chapter is to study planning and management issues in both
category of projects so as to arrive at design of sustainable PPP project.
SECTION-n: DISCUSSION AND ANALYSIS OF CASE STUDIES
As discussed in preceding paragraph, four case studies are selected for the purpose of
discussion and analysis. The selected case studies involve both type of regulations i.e.
Rate of Return and Price Cap. The two cases of IL&FS are related to Rate of Return
regulation whereas remaining two are related to Price Cap regulation. The discussion
of each case study is divided in following parts to have proper comparative analysis.
(a) Project background and formulation
(b) Main aspects of respective concession agreement
253
(c) Actual operations and issues including within its purview financial plan,
financial performance, issues due to lacunae (if any) in concession agreement
and special issues like litigation if any. And lastly,
(d) Policy implications
5.4 CASE-1: CONSTRUCTION OF FOUR LANE ROAD OVER BRIDGE

IN LIEU OF LEVEL CROSSING NEAR VILLAGE
CHALTHAN ON NH NO.-8:
5.4.1 Project Background And Formulation:
Undoubtedly National Highway N0.-8 passing through Gujarat between Vadodara-

Mumbai is busiest corridor and hence Government has implemented four lanning
back in late nineties and now six lanning is in progress in this stretch. In 1994, when
this busiest corridor was got managed by State PWD of Gujarat, the existence of
level crossing on Surat-Bhusaval broad gauge railway line at km 261/2-4 of NH N0.-8
was significant bottleneck.' The Railways were closing the gate for 38 times per day
with average halt of 15 minutes. The traffic intensity was nearing 40,000 PCU per day
which any way required free flow four lane section. Ministry in principle approved
the project of construction of four lane Road Over Bridge (ROB) and almost four km
long four lane approach road on BOT basis at estimated cost of Rs. 820.68. lacs in
1994 and bids were invited on BOT basis by State PWD in month of October 1994.
This was the period when NHAI was not in real action and project formulation for
Golden Quadrilateral was underway. The Ministry took many months to approve the
lowest bid (bids were received in December 1994) for this work and offer was
accepted by Ministry in April 1996 whereas concession agreement was signed in Sept
1996. The project site was part of Golden Quadrilateral later on. This project was
among very first three toll projects approved by Ministry in beginning of PPP era:
first contract was signed on 9-12-1995 for Thane - Bhivandi (Maharashtra) bypass at
estimated project cost of Rs. 103 crore ; second was signed on July 1996 for Udepur
(Rajasthan) at estimated project cost of Rs. 24 crore and ;third contract was signed on
19-9-1996 for this ROB at Chalthan (Gujarat) on BOT basis.(Economic Survey 1998-
99). The bid of ASHVIKA Construction Pvt. Ltd. was approved amounting Rs.
996.74 lacs inclusive of his profit and interest on capital employed allowed at 18%
rate of interest. The concessionaire has used interest rate of 18% in his bid for interest
254
during construction & on residual capital to be recovered while preparing year wise
cash flow. The concept was to recover this cost through specified toll fees from users
of facility. The entrepreneur was awarded for shortest concession period of 23 months
and 5 days from completion of construction. This period was inclusive of 59 days
granted for price variation for delays over original proposal.
Major milestones of the project are as below.
Table: V-l
Chalthan ROB on NH-8: Major Events
Event Date
Bids were invited on BOT basis by State October 1994
PWD for Ministry
Bids were received December 1994
Bid offer was accepted by Ministry April 1996
Concession Agreement signed Sept 1996
Name of concessionaire Ashvika Const. Pvt. Ltd. Vadodara
Construction period(stipulated) 18 months
Toll Period (bidding criterion) 23 months and 5 days
(Source: GOG offices)
As far as project formulation is concerned, this project had proven financial viability
due to heavy interstate traffic and hence bidders were able to bid for very short period
of concession that was beyond predecided construction period. At that time, the
concession period was meant to imply toll period only which is now inclusive of
construction period in later projects. Hence planners kept construction and toll period
separately. The construction period was treated like cash contract and toll period was
simplified like recovering cost of project with interest. The toll rates were capped but
revenues were not capped. The project economics were so strong, whole investment
was possible to be recovered within 2 to 3 years as compared to total economic life of
more than fifty years for the structure. The small size of project was most convenient
to regular construction firms and hence the bidding was done by such companies and
it was awarded to a company established by established civil contractors of State
PWD. The project formulation was good for selection of project but detailing of
project missed some operational aspects and the concession emerged out as an
incomplete contract.
25S
5.4.2 Main Aspects of Concession Agreement:
This Concession Agreement (CA) is found more or less like cash contract. The reason
could be non availability of well-versed concession agreement available to
Government to address all the issues other than construction. Also, the very purpose
behind inviting private sector was to pass on investment requirement to the
entrepreneur (i.e. concessionaire) at the direct cost to the users. The following
similarities were found with cash type contracts.
1. One of the qualification criteria for bidders interested in this work is for past
similar work (not on toll basis) and adequacy of man power/machineries.
Specification and quantities are predefined. The material selection (source of
material) is also predefined. No design flexibility, mainly due to involvement
of railway structure. No aspect is linked to toll operation capacity of bidder.
Thus bid assessment is like cash contract and only change is terms of payment
to entrepreneur. No consideration for debt component or leverage is included
in CA. The Government (specifically it is State PWD) is strong in verifying
construction cost estimate and any superfluous profit is curbed by screening
and negotiations by Government using vast data of rate analysis and
experienced practices. This is not the case in verifying cash flows on payback
or discounting basis. The CA does not include any benchmarks or standards
for financial performance. Hence the whole CA seems like broad cash contract
with detailed covenants on construction only. Here, the Entrepreneur is
supposed to show how he arrived at toll period (in months) but the veracity of
such cash flows is not obligatory for Government since the viability is treated
as entrepreneur’s purview. This indifference or incapacity to verify cashflow
I
given by bidders would actually mean loss of negotiation capacity from

Government side.
2. The construction period & stage wise progress is predefined and delay is
linked to punishment of recovery of Liquidated Damages (LD) subject to
maximum 10% of project cost.
3. Any quantity variation or revision in scope is assessed based on State PWD
Schedule of Rates (SOR). Thus time overrun and cost overrun are treated
more like cash contracts.
256
4. The CA declares Steering Group (STG) as a technical authority on all
technical matters, only after issuance of completion certificate by STG the
work is deemed completed. The railway portion is supervised by Railways and
remaining by State PWD. The entrepreneur has to pay for this supervision.
Thus the scope for coercion is present to major extent like cash contract.
5. All the laws (e.g. labour laws) are similarly applied like cash contracts. Hence,
the entrepreneur has to satisfy all related departments of sovereign and no
relief is available from Government though it is in a sense partner in such
projects. Any permission required from any department is to be obtained by
entrepreneur himself.
6. The construction material requirement and its availability are to be ensured by
the entrepreneur.
7. Like any cash contract, the testing and quality assurance is controlled by State
PWD. The design for safety and workability is stated to be onus on
entrepreneur but his designs need nod of STG/Railways. The stipulations are
like the entrepreneur shall do every thing under approval of Govemment/STG
but if any thing goes wrong the entrepreneur shall bear full risk. Any approval
of STG does not indemnify the entrepreneur from responsibility of design &
execution aspects. So that way the CA is helpful to Government in transferring
construction risk fully to the entrepreneur and still maintaining hold over the
execution. Surprisingly, the structure like ROB is handed over to Government
within two years of construction free of cost. Like cash contracts, indemnity
(except performance guarantee) for remaining designed life is missing here.
8. Similar to cash contracts, the performance guarantee @ 5% of project cost is
to be deposited by entrepreneur but here the term is covering toll period plus
two months.
9. Like many short term cash contracts, price escalation within stipulated 18
months of construction period is borne by the entrepreneur.
10. No mobilization advance is provided which was like then practice of cash
contract. But two months are allowed for mobilization of plant, man power
and machineries which is too large even for cash contracts.
11. Like cash contract, the land is handed over for construction purpose and only
innovation in this case is extension of this land holding term up to end of toll
period. Like cash contracts no ownership or alternative use of land or earning
of rent (only innovation is allowing toll receipts) is allowed.
2S7
One can understand that if the toll project is basically designed on cash contract lines,
the bidders of regular contractor category will only come in to play. Here, the all
bidders were routine contractors and the selected entrepreneur was a consortium of
two big routine contractors of State PWD who joined hands for this project & formed
a special purpose entity. Practically, any road concession will compel the entrepreneur
to think of two major aspects: Construction costs and Toll revenue. Both have to be
anticipated over the concession period being quoted in his offer. Here, the CA has
almost plugged the construction cost economies and for toll revenue, the CA is silent
for any dynamics. Of course the size of investment was very small & the project is on
busiest corridor and hence duration of toll period was also small and hence the project
risk was quite reasonable. In this case, the contractors might have feeling of routine
cash contracts in receiving payments under such short toll period projects. Because
often in cash contracts, payments are delayed in want of money some times by a year
or more.
Under this background, the CA for this work is explored as below. For comparative
purpose the study of concession agreement (CA) has been divided in to following
sections1.
16. Bidding Criteria: As discussed above, the shortest concession period (here it
is only toll period) is accepted as a concession period. The bidding requires
submitting estimates of civil costs as supporting information.
17. Base Case Submission by Bidders: The bidders shall bid in an open
competitive bidding with base case financial model indicating how he will
recover his investment. The agreement expects to get constructed a four lane
facility of ROB at the expense of entrepreneur and in return it allows him to
recover the cost of construction & maintenance, cost of traffic management
and fee collection all with interest @ 18% (essentially it is as per
Concessionaire’s assumption for project cost & its recovery) from charging
vehicles using the vehicles at prescribed rates. It is noteworthy that
Government is not assuring any returns despite accepting cash flow of the
Concessionaire worked out at 18% interest. Because Government is merely
satisfying itself to establish that the Concessionaire is proving the financial
258
viability of his offer through his financial model albeit not getting liable to
Concessionaire’s assumptions.
18. Grant Amount To Concessionaire: This is a concession agreement based on
Price Cap regulation without any capital support or revenue sharing
mechanism.
19. Responsibilities of Government: The Government has not been assigned
any contractual obligation/penalties for not timely completing obligations
related to project. This is because; land was available for construction without
any hurdles.
20. Construction & Maintenance of Facility: The CA is elaborative for civil
works like cash contracts as discussed in earlier Paragraphs. Since, it is a short
period agreement, maintenance is not the issue. The control on construction is
maintained by Government and concept of independent engineer is not used.
21. User Fee: The user fee or toll rates are as per Ministry’s directives to toll
permanent structures. The toll rates are effective from date 19-7-1998(because
construction was completed by 18-7-98) to 17-6-2000 as below but with out
any escalation. More over, the user passing bridge more than once in a day
shall have option of daily pass at 1.5 times one trip fee. Similarly, for frequent
visitors, monthly pass at 30 times of single trip fee shall be allowed. More
over vehicles carrying VIP, emergency service vans and Government vehicles
are exempted from paying tolls. These fee rates are for users passing over the
bridge. The toll rates for each category are depending upon the size of vehicle
but yet not strictly so.
259
Table: V-2
Toll Rates Specified For Chalthan ROB
Vehicle Type Rate of Fee (Rs.)
Two wheelers Nil
Car/taxi, Jeep, LCV, Auto Rixa with or with out trailor 5.00
Bus/Truck loaded/unloaded & with or with out trailor 15.00
Other heavy vehicles e..g. cranes, dozers etc. 20.00
(Source: concession agreement)
Now, this is concession agreement based on Price Cap regulation and hence,
for given price cap, the concessionaire or the entrepreneur would try to
maximize his returns but there is no permission to attract traffic based on any
toll dynamics or any supplementary development. Also, the concession period
was short and CA did not provide for review of toll rates for any revision, not
even for inflation.
22. Free Service Roads For Local Traffic: The local traffic is not identified in
project design. Hence, the local traffic is charged at par. Since it is a bridge
work, free alternative routes are not envisaged under scope of contract. For
convenience of local people, CA permits construction of approaches to the
properties adjoining the road length.
23. Traffic Risk: CA provides traffic census figures on nearby traffic count post
but it is not binding to Government for actual traffic on site. A major
stipulation is- the entrepreneur should carry out his own traffic studies and
assessment independently to arrive at the likely volume of traffic. Hence,
concessionaire shall assess tollable traffic in base year and for future but
Government is not assuring any traffic volume. Adversely, CA is not assuring
any cover against future division or diversion of traffic.
24. State Support Agreement and Construction of Additional Tollway: CA
also states that no restriction of any kind will be imposed by the entrepreneur
on the existing or future traffic routes or facilities to be provided by the
Government or others. It is also stated that, no specific developments will be
undertaken or proposed development will be altered to suit the proposal. This
is very conflicting with present trend of procuring State support agreement for
260
competing routes. The clause shall not have material effect on viability of
project as far toll period is very small.
25. Financial Aspects, Subsistence Revenue and Revenue Shortfall Loans:
The CA is not specific for financing of project. It states to make arrangement
for financing the scheme from entrepreneur’s own resources or from open
market borrowing such as from banks and financial institution against security
of its right to collect the fee for use of the said facility. No Government
guarantees are given for repayment of loans or debentures issued by
entrepreneur. Additionally, no advance or loans are provided for the project by
the Government.
26. Risks, Force Majeure and Termination of Agreement; The CA provides
for relief on Force Majeure events during toll collection. Typically it includes
events of fire, earthquake, floods, storm, war, and strikes at larger level, riots,
legal injunction and closure of bridge for more than 24 hours in want of major
structural repairs etc. The compensation formula is not worked out in CA but
it is left to decision of Steering Group (that is a technical body made of
representatives from Ministry, State PWD and entrepreneur for mutual
resolution of disputes and for making technical decisions) for deriving loss of
toll revenue & interest thereon to be compensated. If it is not possible to
extend concession rights to compensate for revenue shortfall/loss, cash
payments are made. The risk matrix is not detailed in CA but can be derived
from CA as below.
Table: V-3
Risk Allocation as Per Concession Agreement for Chalthan ROB
Type of Risk Who Bears Risk
Commercial or Revenue Risk Entrepreneur
Natural Force Majeure Insurance & residual by <301
Sovereign Risk Government of India
Legal risk Government of India
Political Risk Government of India
Time Overrun and Cost Overrun Entrepreneur
Project Risk Entrepreneur
Financial Risk Entrepreneur
O&M Risk Entrepreneur
(Source : Derived From Concession Agreement)
261
As per CA, the estimated project cost on completion of construction and all
the calculations of cash flow are not assured to be recovered and strictly the
revenue risk is entirely borne by Concessionaire. Since lenders are not having
recourse to assets and Government is not assuring any repayment of debt
incurred by entrepreneur, financial risks are borne by entrepreneur. Though
the project is embedding fully financial operations after construction is over,
the inflation or interest fluctuations are not recognized by CA and hence
financial risk is only borne by entrepreneur. The project formulation is based
on traffic census and importance of NH-8 as a interstate link. However, loss of
revenue due to shift in development through NH-8 to another route or mode
other than road vehicles is project risk which is not recognized by CA and
hence borne by entrepreneur. Any change in law (legal risk) or change in
status of Sponsors for their capacity to offer concessions (Sovereign risk) or
political decision to stop or limit concessions are borne by GOI though not
explicitly committed in CA. But a problem discussed in subsequent Paragraph
due to interpretation of law as encountered by this Entrepreneur is questioning
effectiveness of Sovereign in protecting interests of Entrepreneur. Since CA is
not recognizing any sub layer of Entrepreneur, O&M risk and construction
related risks are borne by Entrepreneur.
A clause allows suspension of work up to one month with out any

compensation to the entrepreneur in case STG desires so for any reason
including for reduction in scope. Even reduction in scope does not attract any
compensation to entrepreneur. Any suspension exceeding 30 days leads to
approval of adequate extension of time limit but with out mention of price
escalations. Any suspension of part of work due to poor quality will mean
equivalent reduction of project cost, in case of limited control of entrepreneur
on toll revenues, such events can prove fatal for viability of project.
Regarding termination due to Force Majeure event, it is not mentioned in the

CA for paying any compensation from Government but it could be in the
purview of Steering group. However, CA has very unilateral understanding for
termination of agreement. The Government reserves absolute right to take
over the facility at any time after compensating the entrepreneur to the extent
of his unrecovered investments and interest liabilities including cost of toll
collection, maintenance costs etc. till that point of time. The compensation for
civil cost is to be worked out on the basis of State PWD SOR. If the
entrepreneur is asked to abandon the work midway then cost of completed
civil work will be compensated on quoted rates basis. If entrepreneur
abandons the work in Ml or in part, the Government will get it completed at
the risk and cost of entrepreneur and the cost incurred by Government will be
treated as dues from the entrepreneur. This amount will be recovered from
entrepreneur’s deposits, by selling of equipments unused material available on
site and amount remaining will be treated as arrears of land revenues. The
termination due to entrepreneur’s fault is not compensated as a simple rule.
27. Lender’s Recourse: The CA is not recognizing lenders and in case of

termination, lenders have no recourse under concession agreement.
28. User’s Recourse: The CA is not mentioning any road side facility to users and
not guiding for making complaint for inconvenience. The CA directs to see
that no bottleneck conditions arise at project site and road surface is
maintained at specified limit of roughness. But value for money that is after
paying for facility the user actually is benefited or not is not ascertained.
29. Dispute Resolution Mechanism: The CA provides scope for amicable mutual
understanding under provision of agreement though Steering group
mechanism. In case of dispute the matter is referred to Arbitration tribunal.CA
provides for appointment of nominee of Secretary (MOSRT&H) as a Sole
Arbitrator subject to Delhi Court jurisdiction. Any further reference can be
made to law Secretary, GOI whose decision is stated to be final & conclusive.
Generally, disputes referred to Sole Arbitrator attract certain costs per sitting
and readings which shall be borne equally by both the party. In practice, the
entrepreneur generally pays first Ml amount if he has claims and share of
government is adjusted with claim amount.
5.4.3 Actual Operations and Issues:
This small size BOT project was supposed to be smooth sailing for the entrepreneur.
The nature of agreement resembled with traditional cash contract and looking to the
heavy traffic volume, operational aspects were expected to be comfortable to the
263
entrepreneur. The entrepreneur opted for following estimation of project cost and
financing plan.
5.4.3.1 Financial Plan of Concessionaire:
The project cost of construction is estimated by entrepreneur here as below while

submitting cash flow for deriving toll period at bidding stage..
Table: V-4
Chalthan ROB Project Cost Estimated By Entrepreneur
Sr. Cost component Estimated Cost
No. (Rs. in lacs)
1 Bridge Structure cost (incl. predecided supervision 202.88
charges paid to railway amounting Rs. 42.88 lacs)
2 Road portion cost (incl. pre decided 5% supervision 630.00
charges paid to PWD amounting Rs. 30.00 lacs)
3 Construction cost for toll plaza with vehicles, amenities 40.20
3 18% Interest dining construction period of 18 months 123.66
(Rs. 830.20 for 9 months & Rs. 42.88 lacs for 18 months)
Total project cost (Estimated) 996.74
The single diversion in estimating project cost in above case vis-a-vis routine cash
contracts is accounting for interest during construction (IDC). In cash contracts, State
PWD is preparing estimates and they do not take in to account IDC though
construction time limit may be as lengthy as 2 years. Here, entrepreneur is bidding
with this project cost to be recovered. The available details of operations suggest that
the project is funded through Rs. 3.40 crores of equity funds and Rs.4.46 crores of
loan funds which meant D/E standing at 1.31:1 only. The loan funds were accessed
mainly from IDBI (Rs. 4.32 crores) while equity was basically share capital from
promoters.
Here, the entrepreneur estimated monthly revenue amounting @ Rs. 59.00 lacs (after
assuming suitably for revenue losses due to allowing daily and monthly passes) and
his estimates expected monthly surplus @ 40.00 lacs after paying for toll operation
cost @ 9.5% of toll revenue & interest at 18% on total capital of approx. 1000 lacs
(i.e. equity also considered to earn at 18% per year). Hence, even a drastic revenue
fall of 50% was not really to affect liquidity of cash flow in any month.
264
5.43.2 Financial Performance:
The financial performance of this project is summarized as below. The Table:V-5:A

depicts operating performance and Table:V-5:B summarizes movements in the long
term sources of finance of this project. The company is using toll asset as inventory in
its financial accounting and operational outcome is carried to this inventory account to
recover its cost. Surprisingly, the operational performance shows loss in recovering
cost of ROB despite project income of total Rs. 1331.19 lacs in 700 days of operation
(19-7-98 to 17-6-2000). The above income is @ Rs. 58.00 lacs per month and it is
very much matching with estimates. Similarly, operating surplus is totaling to Rs.
1169.45 lacs that is Rs.50 lacs per month. This is in fact above the estimated surplus
of Rs. 40 lacs per month. The actual cost of project including 1DC up to FY 1998 is
Rs. 718.27 lacs and remaining construction cost of Rs.550.93 totals the cost at Rs.
1269.2 lacs or say Rs. 1270 lacs vis-a-vis estimate of Rs. 996.74 lacs. This actual cost
includes supervision charges to railways and PWD. As per supervision charges of Rs.
15.40 paid to the GOG during FY 1998 to FY 2001, the cost of approach road portion
works out to be Rs. 308 lacs only ( estimated cost was Rs. 600 lacs) i.e. there is huge
excess in cost other than road portion. As per CA, Government is not supposed to
verify actual expenditure of above said amount. The excess in project cost is the only
factor that has led to report loss in the account books. The project did not see time
overrun.
Table: V-5: A
Operational Performance of Chalthan ROB (Rs. in Lacs)
Financial Total Interest Depreciati Operating Operating Construction Net

Year Income paid on of fixed expenses (excl. surplus expenses surplus
assets excl. Interest & carried
ROB Depreciation) to
bridge
account
1999 510.66 57.51 0.28 20.87 432.00 550.93 -118.93
2000 614.23 67.01 0.67 5.38 541.17 0.07 541.1
2001 206.30 0.50 0.52 9.00 196.28 0.38 195.90
(Source: Annual reports of Chalthan ROB)
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Table: V-5:B
Movements in the Long Term Sources of Finance of Chalthan ROB
(Rs, in Lacs)
Financial Secured Unsecured Owner’s Cost recovery for ROB
Year loans loans Equity Opening Net ROB as
(mainly (from (Paid up balance surplus inventory
EDBI) promoters shares only carried to
only) as there are bridge
no account
reserves)
(1) (2) (3) (4) (5) (6) (7)
1999 435.00 11.78 340.76 718.27 118.93 837.21
2000 97.56 11.78 340.76 837.21 -541.10 296.12
2001 0.00 11.78 340.76 296.12 -195.90 100.22
(Source: Annual reports of Chalthan ROB)
S.4.3.3 Litigation on Free Passage to Local Traffic:
A major reason for selecting this project is for demonstration of legal risk faced by the
entrepreneur owing to incomplete contract provisions. The issue was, bid documents
did not specify location of toll booths except indicating that one side of ROB, toll
plaza will be constructed. The Ashvika Const. Pvt. Ltd (entrepreneur) also submitted
bid with this limitation. But at advance stage of construction, entrepreneur got
approval to construct toll plaza on both sides Of ROB to catch traffic entering project
site but escaping to local bypass through another level crossing near Chalthan sugar
factory. This bypass was serving as an alternative free link and the entrepreneur was
interested to trap this traffic. It was also only way for reaching village Chalthan from
both sides of ROB on NH and was useful for local villagers to reach the sugar factory
and residential property. The site situation is illustrated in figure-V-1. The public
resistance was faced from local road users on Kadodara side of ROB. The toll booths
were ransacked on its first day of operation and later a local group admitted
contention in local court for levy of tolls on users who actually used very small length
of approach road before getting diverted for Chalthan sugar factory. The entrepreneur
was forced to operate from only one toll plaza from Mumbai side. The court passed an
injunction on levy of toll on such local users based on provisions in the CA. This was
confirmed in final order from court that only those who actually cross railway line
using bridge structure shall be tolled. This was against the interests of entrepreneur
266
who was helpless in want of definition of tollable traffic in the CA. The entrepreneur
attempted for compensation through Steering group who partially agreed for this
issue. When entrepreneur took recourse of Arbitration, the Court order prevailed in
the decision of Arbitration.
Figure-V-1
In above case, the traffic data provided by GOG (April 1994) at bidding stage was for
Kadodara junction point and hence it involved local and through traffic both. The
entrepreneur used State data and assumed this traffic to grow at 5% per annum. But as
per GOG traffic census, the number of cars (and 3 wheelers) grew at 45% between
Aprill994 to Oct 1999; the number of buses grew at 300% between Aprill994 to Oct
1999; the number of trucks grew at 20% between April1994 to Oct 1999. The erratic
nature of traffic census is observed in Year 2000 and hence the growth of traffic is
also compared with average traffic during April 1998 to Oct 2000 i.e. covering toll
period. Then this average number of cars (and 3 wheelers) shows growth of 24% from
datum (April 1994); average number of buses shows growth of 200% from datum
(April 1994); and same is 9% for trucks. Hence the traffic growth was above the
expectations of the entrepreneur. Though the entrepreneur realized monthly income
almost as per his estimates, entrepreneur argued that this similarity was due to overall
267
growth in traffic which was not folly accessible due to leakage as explained above.
The entrepreneur claimed that due to injunction from court, a huge portion of traffic
leaked out and actually tollable traffic was significantly below the above census
figures. The contention of entrepreneur was, respecting the court order would require
compensation from the Government. The Arbitration took cognizance of CA
stipulation that, the entrepreneur was supposed to confirm local conditions himself
through surveys and GOG details were for reference only. Thus, court injunction did
not get coverage under Force Majeure for compensation to the entrepreneur.
Table:V-6
Average Daily Traffic at Kadodara Junction Km 259/4-6 On NH-8
Month/ Car/ Bus Truck Other PCU (Considering ail
Year Jeep / Heavy 2,3,4 & more wheel &
3 animal driven vehicles)
wheelers
Aprill994 5886 920 13738 659 54933(data during
inviting tender)
Oct 1994 7073 1429 15141 93 61499(data accessible
before submitting bid)
Oct 1995 7347 2285 15714 0 67714
April 1996 7463 2625 16019 0 70089
Oct 1996 7293 2789 15942 0 70328
April 1997 7947 3091 15981 283 72031
Oct 1997 7535 3044 16188 327 72734
Aprill998 8130 3270 16166 0 73906
Oct 1998 7938 3320 16607 431 76040
April 1999 8498 3620 16518 457 77145
Oct 1999 8541 3697 16578 0 77713
April 2000 5237 1343 12685 0 48119
Oct 2000 5426 1576 11477 82 52467
Average daily 7295 2804 15005 162 67565
traffic during
operations (4/98-
10/2000)
(Source: Traffic datafrom GOG traffic census)
5.4.4 Policy Implications From Case Study:
During the tenure of this project, the Government was very keen to take up BOT
project but in want of experience, the CA was framed in line with cash contract that
focused more on input to civil works. As the CA was designed on Price Cap
regulation, the Government did not attend the details like actual cost incurred or
actual toll received by the entrepreneur. Hence, evidently viable project recorded
268
losses in account books. The bidders submitted financial plan which was agreed by
Government only as a lowest offer. After the transfer of assets, the departmental
tolling continued as per NH rules for permanent structure. Hence, following points are
raised from study of concession agreement and available relevant details for its
practical implication in construction and operation. The lacunae pointed out in this
CA are leading to suggest appropriate corrections for future works.
1) The present format of traffic census is very general and hence project specific
decisions are not possible from such data. The traffic is essence of BOT project
and hence, at least Government shall have traffic figures ready at bidding stage
in terms of tollable traffic so that Government knows beforehand probable toll
period for given project. This information can give good negotiation power to
Government like Schedule of Rates serves in finalizing cost of civil work. The
Model Concession Agreement (MCA) 1999 & MCA 2006 have provided for
traffic sampling during toll period but at project formulation stage, traffic is
mystery even for Government.
2) From the case of Chalthan ROB it emerges that the location of toll booth shall
be most critical design parameter for BOT projects. Generally every toll road
covers some intersections in terms of access to local villages, temples etc. which
are costly to avoid by constructing grade separations. The issue is managed in
case of access controlled expressways but in small projects it remains as a
headache to the entrepreneur. Due to such intersections, alternative free routes
are developed in pieces and they help in sneaking through tolled facility. Hence,
entrepreneur is compelled to deploy extra personnel to check such pilferage
which is unforeseen aspect of many toll projects. Government as a partner
ignores such public issue in project design and passes the risk to the private
sector as a commercial risk.
3) Government has addressed issue of local traffic differently for the case of local
users using the project length in part or foil Government has rebated heavily
(only 25% of toll fees to be levied for local users using private vehicles and 50%
of toll fees to be levied for commercial vehicles) as per MCA 1999 or exempted
local traffic as per MCA 2006. But it is difficult to sort out local traffic from
heavy volume of throughput. Also, entrepreneur is voluntarily compelled to
exempt traffic getting diverted after traveling little on toll road to avoid local
friction.
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4) After traffic, the project cost is a major concern in concession design. As
discussed above, Government allows the entrepreneur to work under provisions
of CA to achieve what ever cost economy is achievable. In the turn, Government
passes time and cost overrun on entrepreneur. Unlike cash contracts,
Government does not monitor expenses on project and hence profitability of
projects is not known to Government.
5) Under Price Cap regulation, the entrepreneur is allowed to earn or lose under
given ceiling on toll rates but within agreed upon limited toll period. Thus for
financial viability of project, the cash out (project cost) and cash in (toll income)
both attributes are unmonitored leading to dangerous uncertainty to project
outcome. As it is already initiated under MCA 1999 and MCA 2006, some
guarantees/relief shall be available either on traffic count or on debt servicing
for sustainable PPP. This will absorb superfluous profits and provide cushion on
adverse operating conditions. The conceptual modification to existing
concession agreement ofChalthanROB is illustrated under Figure: V-2.
Figure: V-2
Conceptual Understanding of Chalthan ROB BOT Project
(Prepared based on above case details)
For sustainable PPP, neither unplanned profits nor unplanned hardships shall be
allowed by virtue of careful concession agreement. The concession shall not be a
speculation business considering public nature of the road sector especially when
270
concessionaire has no direct influence on demand for travel. Also, it should not be
literally build-operate- transfer on recovery of investments. As discussed under
Chapter-Ill of this study, Kerf et al. (1998) quotes the famous nineteenth century
economist Alfred Marshall for design of concession as- the competition for the
franchise shall turn on the price or the quality, or both, of the services or the goods,
rather than on the annual sum paid for the lease (i.e. in Ipdian context concession fees
mentioned under MCA 2006). Thus, the concession shall be focused on achieving
lower prices to the users or shall render superior services to them instead of focusing
merely on passing over investment obligation to private sector. Practically, the
Chalthan ROB was handed over back to GOG and GOG collected tolls (which were
linked to WPI for revision) departmentally and then through agencies charging own
charges at 14% of toll collected. By introducing some guarantee for recovery of
investment and in this specific case, by extending toll period appropriately benefits
can be realized like - lower toll rate during concession period and hence higher toll
acceptance; design risk and long term maintenance is assigned to the same entity for
qualitative maintenance; if Government is willing to earn from project then upfront
negative grants or enhanced concession fess in later years of tolling can be expected
from such projects. The major benefits shall however reach to users in terms of long
term qualitative maintenance and reduced tolls.
5.5 CASE-2: CONSTRUCTION OF DELHI-NOIDA TOLL BRIDGE IN

NOIDA (UTTAR PRADESH STATE):
5.5.1 Project Background and Formulation:
The Delhi-NOIDA Toll Bridge (also called as Delhi-NOIDA Direct (DND) Flyway)
is an eight lane link over the Yamuna River connecting Maharani Bagh (on Delhi
side) with Sector 15A/16A on the New Okhla Industrial Development Authority side.
The New Okhla Industrial Development Authority (NOIDA, a local authority in UP
State) has established a new integrated industrial township (also called ‘NOIDA’) in
close proximity to Delhi. The NOIDA is located east of the Yamuna River and is one
of the satellite towns of Delhi. Though any inception report for need of this bridge is
not available but after construction of this toll bridge, a project traffic validity study
(WSA Engineers India 2003) revealed that aggregate traffic on the four bridges (the
traffic between East Delhi, NOIDA and Greater NOIDA is serviced by four bridges,
including the Delhi -NOIDA Toll Bridge) was serving heavy traffic of 3, 70,000
271
PCUs in 20022. The report also stated that approximately 30% of Delhi’s population
lived across the Yamuna river. NOIDA alone accommodated approximately 4, 50,000
people, approximately half of them commuted to Delhi for work daily. In this case,
the Bridge offers advantage in terms of saving in distance and time, vehicle operating
cost and convenience as compared to the other toll free options. The Delhi -NOIDA
Toll Bridge is designed for average speed of 80 Kmph and average travel time taken
between South Delhi and NOIDA via Delhi-NOIDA Toll Bridge is about 6-8 minutes.
The bridge saves at least 30 minutes in travel time during the peak hours and reduces
the distance by around seven kms.
The project formulation was based on recovering investment through tolls in

promising region of NOIDA. It was an unsolicited proposal from IL&FS that was
accepted by Government in want of requirement of huge funds in this project. To
implement the project Infrastructure Leasing & Financial Services (IL&FS), NOIDA
and the Delhi Administration (DA) agreed for the implementation of Delhi-NOIDA
Toll Bridge on Build, Own, Operate & Transfer (BOOT) basis. A tripartite
Memorandum of Understanding (MOU) was signed between IL&FS, NOIDA, and
Delhi Administration on April 7, 1992 for establishing the new bridge and defining
the scope and mutual obligation of the various partners. Thus it was a Public - Private
Partnership effort whereby IL&FS received a mandate from NOIDA/Delhi
Administration. Pursuant to the MOU, a Steering Committee consisting of
representatives of Government of Uttar Pradesh, Delhi Government, the Ministry of
Urban Affairs and Employment, Government of India, Delhi Development Authority
(DDA), NOIDA and IL&FS was established for monitoring the Delhi-NOIDA Toll
Bridge and taking decisions relating to the development of the Delhi-NOIDA Toll
Bridge. As per Steering Committee recommendation, a special purpose vehicle
namely NOIDA Toll Bridge Corporation Ltd (NTBCL) was set up to construct this
bridge and run the project. NTBCL was incorporated on April 8, 1996 under the
Companies Act, 1956 for the purposes of developing, establishing, designing,
constructing, operating and maintaining the Delhi NOIDA Toll Bridge.
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Major milestones of the project are as below.
Table:V-7
Delhi-NOEDA Toll Bridge Major Events
Commencing from 30 December 1998
Event Date
Signing of the Memorandum of Understanding April 7, 1992
World Bank review and approval January 1996
NTBCL was incorporated April 8,1996
Concession Agreement signed November 12,
1997
Award of EPC Contract to Mitsui Marubeni Corporation January 19, 1998
Physical possession of project land handed over to Mitsui May 8, 1998
Marubeni Corporation
Signing of financial agreements & financial close October 30 1998
Shareholders’ Agreement signed December 9,
1998
Commencement of construction and release of Mobilization December
advance( Concession period of thirty years starts from this date) 30,1998
Appointment of Intertoll as O&M contractor December 21,
1998
Listing of shares of NTBCL on BSE, NSE and UP stock December, 1999
Exchange
Commencement of Commercial operations (next day of February 7, 2001
substantial completion of construction)
DND Flyway Limited (100% Subsidiary of NTBCL incorporated Feb 17, 2004
for property development activities)
(Source: NTBCL 2005)
Thus IL&FS and Government jointly stood as a sponsor of the project as compared to
usual Government Sponsorship. A concession agreement (CA) was entered in to by
NOIDA, NTBCL and IL&FS conferring to NTBCL the right of implementation of the
DND Flyway project. The NTBCL is thus concessionaire but it has been awarded the
project without facing competitive biding. In this project IL&FS has acted as not only
sponsor but de facto concessionaire making largest equity contribution in NTBCL.
5.5.1.1 Role of IL&FS and World Bank In Project Formulation:
Under newly introduced country assistance strategy (CAS) of World Bank for FY96-
98, the Bank proposed to increase its assistance in establishing an environment
conducive to efficient private investment in infrastructure giving loans for policy-
based investment operations. The Bank noted that IL&FS being a 51% privately
273
owned finance Company with strong ties to the public sector, selection of IL&FS as
the first financial intermediary to receive the Bank’s support was appropriate
endorsing its exceptional understanding of the synergy required between public and
private interests for successful infrastructure development, its highly competent and
innovative staff, and its high-quality Board. By supporting IL&FS, the focus of the
Bank was to assist first hand in the development of prototype contractual
arrangements for private investment in infrastructure thereby facilitating entry of the
private sector on a much larger scale in areas heretofore dominated by the public
sector. The World Bank used IL&FS as a vehicle for various purposes like- to build
up India’s capacity to attract private investment in infrastructure, pilot-test
institutional and contractual arrangements in a variety of subprojects under various
administrative and political conditions, and help establish a track record as a pre
requisite for large-scale private investment in the sector (WB 1996).
The Infrastructure Leasing and Financial Services Limited (IL&FS) was established
in 1987 following the amendment of 1983 to the Banking Regulation Act of 1949
allowing Indian commercial banks to enter the leasing business through separate
subsidiaries. To promote its leasing activities, Central Bank of India (CBI), a major
nationalized commercial bank through a joint venture with Unit Trust of India (UTI),
a public sector mutual fund management, and Housing Development Finance
Corporation Ltd. (HDFC), the country’s leading private housing finance institution set
up this non-banking financial Company (NBFC). The IL&FS prepared a five year
corporate plan to create commercial infrastructure assets amounting Rs. 275 million in
1995- 1996 to Rs. 9863 million by 2000-01. The aggregate cost of the subprojects in
the pipeline (including development costs) to be taken up through IL&FS was
estimated at about Rs.58,000 million (US$1.6 billion). IL&FS was expecting real rate
of return @14% on investments. The commercial projects to be taken up or in pipe
line with many State bodies were including Delhi - NOIDA Toll Bridge, widening
Vadodara-Halol & Ahmedabad- Mehsana State Highways in Gujarat etc.
IL&FS moving into the infrastructure sector from leasing meant that the average
maturity of its assets will grow & to manage its liquidity risk, the average maturity of
its borrowings must also be increased. IL&FS was therefore looking to take up more
medium and long-term debt in addition to presently raising medium-term funding
274
from domestic commercial banks. Looking to limited capacity of such banks to
provide longer maturity debt & in the absence of a well-functioning long-term debt
market in India, IL&FS had no other option but tap foreign sources for long-term
funds. IFC being not in a position to provide additional funds the World Bank was
thus considered to be the main source of funds to meet the pressing needs for long
term financing. The Bank agreed subject to GOI guarantee for loan of US$200 million
to IL&FS, to be repaid over a period of 20 years (including 5 years of grace) at the
Bank’s standard interest rate for LIBOR-based single currency loans subject to some
financial discipline at IL&FS. Proceeds of the Bank loan were to be onlent either (i) in
rupees at a market-determined rate. In this case, IL&FS will bear the foreign
exchange risk; or (ii) in US dollars at a variable market determined rate to subprojects
as listed by IL&FS in pipeline. The tenor of the subloans will vary between 17 and 20
years. The Bank wanted mainly IL&FS to - maintain at all times a debt service
coverage ratio of not less than 1.25; and maintain at all times a debt to equity ratio of
not more than 6:1. While extending line of credit to such projects, Bank stipulated that
there shall not be more than 75% debt (senior and subordinated) and promoter's
contribution to represent at least 25% of the equity. The Bank assured financial
assistance maximum 25% of individual subproject cost. Proceeds of the Bank loan
were to be onlent only to those projects in which the entire financing package has
been finalized (WB 1996).
Thus, IL&FS with WB credit line pioneered private sector participation on financial
front in the field of infrastructure (including roads) when the MOSRT&H and State
Governments were yet not prepared for discussion on this policy change. NTBCL
was the first private sector Build-Own-Operate-Transfer road project in India and the
first project to be funded by a World Bank credit line of $200 million through IL&FS.
The World Bank has thus participated in the financing of this project through a line-
of-credit granted to IL&FS out of which IL&FS used US$13.5 million (Rs 600
million) for providing a rupee term loan facility to the NTBCL.
5.5.2 Project Details:
The Toll project has following physical and contractual features.
275
5.5.2.1 Salient Features of Delhi-NOIDA Toll Bridge:
This is a world class toll way with many innovations like, first project built solely by
using dredged river sand instead of the conventional method of earth-fill through road
transportation. This resulted in substantial saving of time and cost as well as
prevention of dust and noise pollution that would have resulted from transportation of
earth-fill by 700 to 800 trucks per day. It is first 8 lanes, 552.5 m long continuous
bridge with expansion joints only at the abutments and uses technique of external
prestressing. The salient features are: .
■S An Eight Lane link across the river Yamuna
S A 552 meter long main bridge and 3 minor bridges
S 8 lane approach road
S Tree Plantation and arboriculture
S Noise Barriers
S Grade separated interchanges at either side
S Average Design speed: 80 Kmph
•/ Average travel time (NOIDA to Lajpat Nagar, New Delhi): 8 minutes
S River training works
S Flyover at Ashram Crossing
For Toll Plaza:
S Location: NOIDA
S No. Of lanes: 27
S Total width: 300 meters
■f Method ofpayment: Cash/ Prepaid/Electronic Toll CoHection (ETC) systems
5.5.2.2 Main Aspects of Concession Agreement:
This BOOT project is assigning job of Design-Build -Finance-Operate (DBFO) to the

concessionaire. The structuring of this project is better understood in terms of
276
provision under concession agreement. This pioneering project was crafted by IL&FS
on Rate of Return regulation basis and was outcome of unsolicited initiatives from
IL&FS for Public- Private Partnership in road sector. Modifying structure adopted in
earlier case study to the requirement of this project, various aspects of actual
provisions under the CA for this project are discussed below.
1. Bidding Criteria: As discussed above, no bidding was done for award of

monopoly under CA. Thus competition for field was avoided by sponsors.
2. Base Case Submission by Bidders: The concession agreement accepts base

case financial model prepared by NTBCL and it is useful like benchmark for
any variation in project cost and toll revenue. Here, definition of project cost
holds huge importance. The project cost including civil cost and IDC is
certified by Independent Engineer (IE) and Independent Accountant (IA) at
the end of construction. Then every year, IE/LA determine residual project cost
to be recovered based on revised cost of project due to additional
expenditure(beyond base case)and deficit in assured returns. The concession
period is extended accordingly to recover the shortfall in returns.
3. Grant Amount to Concessionaire: Theoretically, any project based on Rate

of Return regulation can be assumed to demand capital grant if toll revenues
are low to fit in reasonable length of concession period. Similarly, a sound
project can earn upfront negative grant or yearly concession fees to the
Government if for given toll structure or concession period the project has
very promising cash in flow. Here, sponsors have assumed that variable
concession period will take care of abnormal profits and also viability
concerns.
4. Responsibilities of Government: The Government has not been assigned any

contractual obligation/penalties for not timely completing obligations related
to project. The existing and future problems related to utilities and land
acquisitions are left to the Government. Indirectly, any delay from
Government on account of delayed clearances is going to increase project cost.
5. Construction & Maintenance of Facility: The CA is referring to EPC for

civil works like cash contracts. The IE/ IA play major role in determining
actual expenditure incurred on the project and its admissibility to project cost
277
to be recovered. Similarly, these two consultants determine quality related
decisions and time overruns admissible for project cost. The IE/IA shall be
appointed for the entire term of the Concession Agreement. The Independent
Auditor shall approve the format for the maintenance of accounts, the
accounting standards and the method of cost accounting to be followed by the
Concessionaire. The Independent Auditor shall audit, on a quarterly basis the
Concessionaire’s accounts. The Independent Auditor shall also certify the
Total Cost of Project outstanding and compute the returns thereon from time
to time on a per annum basis. The technical approvals and certifications are
done by IE.
For maintenance, a separate O&M Contract provided that (i) for the period
until 2011, Intertoll India shall be entitled to a fixed fee of 11% of the actual
gross tolls collected from users of the bridge, and (ii) thereafter Intertoll India
shall be entitled to a fee of Rs 0.725 per vehicle crossing the Delhi NOIDA
Toll Bridge and a fixed fee of Rs 2.656 million (US$59,725) per month to be
escalated annually in line with the Consumer Price Index using a base of
November 1998. The costs of periodic maintenance are reimbursable
additionally.
6. Project Cost and Returns: The total project cost shall be the aggregate of -
Civil cost of original work with IDC; Major Maintenance Expenses; Shortfalls
in recovery of Returns in a specific financial year. The Project Cost has to be
determined on the Project Commissioning date by the Independent Auditor
with the assistance of the Independent Engineer. The amounts available for
appropriation by NTBCL for the purpose of recovering the total project cost
and the returns thereon shall be calculated at annual intervals from the
Effective Date in the following manner:
Total Revenues to be appropriated =
Gross revenues from Fee collections, income from advertising and

development income
Less: O&M expenses
278
Less: Taxes (excluding any customs or import duties because these taxes are
attached to item cost of equipment or material in civil work and hence already
accounted for.
7. Extension of Concession Period :The Concession Period shall commence on

30 December 1998 (the Effective Date) and shall extend until the earlier of: a
period of 30 years from the Effective Date; the date on which the
Concessionaire shall recover the total cost of the project and the returns as
determined by the independent auditor and the independent engineer through
the demand and collection of fee, the receipt, retention and appropriation of
development income and any other method as determined by the parties. In the
event of NTBCL not recovering the total project cost and the returns thereon
within the specified time the Concession Period shall be extended by NOIDA
for a period of 2 years at a time until the total project cost and the returns
thereon have not been recovered by the Concessionaire. The CA is not
mentioning cash transaction for making good the deficit in assured returns.
8. User Fee: The Concession Agreement had determined the Base Fee Rates as
on base year 1996 and shall be revised to determine the initial fee to be
applied to the users of the project on the Project Commissioning Date (the
“Initial Fee Rate”). The following are the Base Fee Rates:
Table:V-8
Base ToB Rates on DND Flyway (Rs/Trip)
Vehicle Type One Way Fee in Rs.
Earth moving / construction vehicle 30
For each additional axle beyond 2 axle 10
Truck - 2 axles 30
Bus - 2 axles 30
Light Commercial Vehicle 20
Cars and other four wheelers 10
Three wheelers 10
Two wheelers 5
Non-motorized vehicles -
(Source: CA for NTBCL)
279
The inception stage fee rates are given by
IFR = CPI (I)*Base Fee Rate/CPI (B)
Where,
IFR = Initial Fee Rate
CPI ( I ) = Consumer Price Index for the month previous to the month of
setting the Initial Fee Rate
CPI ( B ) = Consumer Price Index of the month in which this Agreement is

entered into
These rates are referred to actual landed project cost and willingness to pay
results for upward revision only.
The Fee Rates are to be revised annually by the Fee Review Committee. A Fee
Review Committee is established which comprised of one representative each
of NOIDA, the Concessionaire and a duly qualified person appointed by the
representatives of NOIDA and Concessionaire who shall also be the Chairman
of the Committee. Fee rates are revised as per the following formula:
RFR = CPI (R) * IFR / CPI (I)
Where,
RFR = Revised Fee Rate
CPI (R) = Consumer Price Index for the month previous to the month in which
the revision is taking place
CPI (I) = Consumer Price Index for the month previous to the month of setting
the initial fee rate
IFR = Initial Fee Rate
Thus the CA is relating toll levels with CPI instead of NH practice of indexing
with Whole Sale Price Index (WPI). The revision of tolls over the years is
given under Table:V-9. The toll levels are not capped but the increase is also
not linked to CPI as found from Table-V-9. The reason for irregular fee
increase is as under.
280
As per CA, the Fee Review Committee shall take all steps to ensure that the
revenues from the Project are maintained at levels sufficient to recover the
Total Cost of Project and meet the Concessionaire’s Returns thereon. When
determining whether a revision to the Fee is warranted, the Fee Review
Committee may consider, among other circumstances, (i) the benefits to the
Users, (ii) traffic flow over the Project, (iii) any increase in any cost of
expense in relation to the Project owing to the occurrence of an event under
subsection I above, and (iv) the Concessionaire’s Debt Service obligations.
The inadequacy of project cashflow governs the decision for practical purpose.
Table: V-9
History of Toll Rate Revisions on DND Flyway (Rs/Trip)
Class 2001 2002 2003 2004 2005 2006
(Inception)
Two Wheelers 7 7 8 8 8 9
Cars/Jeeps/3W 15 15 15 16 17 18
LCV 30 30 30 30 35 35
Buses/ Trucks 35 35 40 40 40 45
Large Vehicles 50 50 55 55 60 60
Extra Large Vehicles 60 65 70 70 75 80
(Source: NTBCL Traffic Study 2006)
9. Free Service Roads For Local Traffic: Since it is a bridge work, free
alternative routes are not envisaged under scope of agreement..
10. Traffic Risk: Since it is a project based on assured returns, traffic or any such
risks are not identified and allocated to the NTBCL. The NBTCL is proactive
to the traffic level on the project and has engaged consultants to revalidate
traffic assumptions made earlier. Accordingly project has been rectified. One
provision of grant of development rights of surrounding project land is helpful
to NTBCL to mitigate risk of traffic plying lower than estimated.
11. Special Rights to Concessionaire: The concessionaire has been given the
right to mortgage its interest in the project assets, including the project site.
This is unusual looking to the public nature of such land. However, the BOOT
contract includes ownership aspects and hence such rights are available with
Concessionaire.
The Concessionaire is also provided another BOOT based right to develop

land as explained hereunder. Upon reference by the NTBCL (i.e. company), if
2S1
the Independent Auditor determines that the Project is not generating
sufficient revenues for the Company, then the Company may request that
NOIDA grant or cause the Governments of Uttar Pradesh or Delhi, as the case
may be, to grant to it Development Rights (Le. additional rights, property and
assets which are not part of and not anticipated to be part of the Project as on
the date of the Concession Agreement, which may include without limitation
the provision of advertising services, the right to develop hotels, or other
facilities) for the purposes of generating income. In this regard, NOIDA has
the sole discretion to grant Development Rights in favour of the Company.
The project has assigned 65 acres of land in Delhi & 34 acres in NOIDA for
this purpose.
12. State Support Agreement and Construction of Additional Tollway: The

Concession agreement required signing Support Agreement by State
Authorities Establishing bilateral monopoly between the Government and the
concessionaire. This included not to allow construction of any other passage
across the Yamuna which is toll free or charges lower toll than the NOIDA
Bridge within a radius of 5 kms from the Delhi -NOIDA Bridge site for a
period of 10 years or till the Delhi-NOIDA Bridge achieves full rated capacity
(defined as 16,000 passenger car units during a peak hour) , whichever is later,
without the written consent of NTBCL. In the event of any breach of the
Support Agreement Government of UP and/or Delhi Government shall
compensate NTBCL and/or NOIDA for any costs incurred by them and the
Lenders pertaining to the project. Now, even by 2007 the DND flyway has not
seen projected traffic & hence full rated capacity is likely to reach much after
stipulated 10 years. The CA assures designated rate of returns hence provision
for competing routes and State support are actually not relevant.

The CA is not specific for financing of project. The CA is not making any
reference to subsistence level revenue or revenue shortfall loans.
14. Risks, Force Majeure and Termination of Agreement.* The Concession

Agreement provides for three different classes of Force Majeure, namely
“Natural Force Majeure Events”, “Direct Political Event” and “Indirect
Political Event”. The CA is not distinguishing occurrence of events during
282
construction and toll period. The remedies and compensation under each class
of events is explained below.
Natural Force Majeure Events: Events such as earthquakes, epidemics,

natural disasters and floods etc, will be treated as “Natural Force Majeure
Events” under the Concession Agreement. If the Force Majeure events
continue beyond a period of 14 days, the IE/IA shall submit a detailed report
dealing inter alia, with the effect of the Force Majeure event including that on
the financial viability of the Project and the steps that can be taken to mitigate
such effect. Within two days of receipt of such report, the parties are required
to submit the same to the Project Oversight Board for determination as to what
steps should be taken by the parties. If the Project Oversight Board determines
that the Delhi-NOIDA Toll Bridge project is no longer viable as a
consequence of the Force Majeure events, the affected party has a right to
terminate the Concession Agreement. If either the Company or NOIDA elect
to terminate the Concession Agreement NOIDA shall pay to the Company an
amount equivalent to the aggregate (as determined by an Independent Auditor)
of the Lenders’ dues, the cost of transferring the Project assets to NOIDA (or
any agency nominated by NOIDA) less the Debt Service Reserve (provided
the reserve has been utilized for the purpose for which it was created) and less
the Insurance proceeds.
Direct Political Event: Events such as any change in law, or any decisions or
orders of the Court restraining all or any part of the activities or any
discriminatory revocation or refusal to renew any clearance, which may be
required by the Company, are treated as “Direct Political Events”. If the Force
Majeure events continue beyond a period of 14 days, the procedure for
referring to Oversight Board is same as above. If the Project Oversight Board
determines that the Delhi-NOIDA Toll Bridge project is no longer viable as a
consequence of the Force Majeure events, the affected party has a right to
terminate the Concession Agreement. If either the Company or NOIDA elect
to terminate the Concession Agreement on the continuance of a Direct
Political Event, NOIDA shall pay to the Company amount (as determined by
an Independent Auditor) equivalent to the aggregate of the Lenders’ dues, the
cost of transferring the Project assets to NOIDA (or any agency nominated by
283
NOIDA) and a 20% equity return less Debt Service Reserve (provided the
reserve has been utilized for the purpose for which it was created) and less the
Insurance proceeds.
Indirect Political Event: Events such as war, strikes, lockouts etc will be
treated as an event of Force Majeure under the head “Indirect Political Event”
under the Concession Agreement. If the Force Majeure events continue
beyond a period of 14 days, the procedure for referring to Oversight Board is
same as above. If the Project Oversight Board determines that the NOIDA
Toll Bridge project is no longer viable as a consequence of the Force Majeure
events, the affected party has a right to terminate the Concession Agreement.
If either the Company or NOIDA elect to terminate the Concession Agreement
NOIDA shall pay to the Company an amount (determined by an Independent
Auditor) equivalent to the aggregate of the Lenders’ dues, the cost of
transferring the Project assets to NOIDA (or any agency nominated by
NOIDA) and a 10% equity return less the Debt Service Reserve (provided the
reserve has been utilized for the purpose for which it was created) and less the
Insurance proceeds.
Temporary Control of NOIDA: Under the Concession Agreement, NOIDA

can assume temporary control of the Delhi -NOIDA Toll Bridge in the event
of national or state emergency. If NOIDA fails to return control of the Delhi-
NOIDA Toll Bridge within the specified period of three days, or if such
national or state emergencies extend beyond three months, it will be treated as
an event of Force Majeure. NOIDA terminate the contract electively by
paying off project costs with designated returns at any time.
NOIDA Event of Default: Events or circumstances to the extent not caused

by a default of the Company or Force Majeure shall be considered a “NOIDA
Event of Default” and if not cured within the time period permitted, the
Company shall have the right to terminate the Concession Agreement as
provided therein. A NOIDA Event of Default shall include events or
circumstances involving (i) changes in law or change in policies by NOIDA
having a material adverse effect or materially affecting the Lenders, (ii) any
breach of NOIDA’s obligations under the Concession Agreement which has a
material adverse effect, (iii) any breach of representations and warranties by
2 84
NOIDA which affects adversely NOIDA’s ability to perform its obligation
under the Concession Agreement, (iv) any repudiation of the Concession
Agreement by NOIDA, and (v) any breach by either the Government of Uttar
Pradesh or the Government of Delhi of the terms of their Support Agreement
materially affecting the Company. In the event that the Company terminates
the Concession Agreement upon a NOIDA Event of Default, NOIDA is
obligated to pay the Company the aggregate of all sums due to the Lenders,
the Total Project Cost and the 20% return thereon outstanding as on the date of
termination and the costs of transferring the project assets after deducting the
aggregate of any cash reserves created for debt service obligations of the
Company (provided such reserves have been utilised for the purpose for which
they were created) and the proceeds from insurance.
Company Event of Default: Events or circumstances to the extent not caused

by a default of NOIDA shall be considered as a “Company Event of Default”
and if not cured within the time period permitted, NOIDA shall have the right
to terminate the Concession Agreement as provided therein. A Company
Event of Default shall include events or circumstances involving (i) any
breach of the Company’s obligations, representations and warranties by the
Company which affects adversely its ability to perform its obligation under the
Concession Agreement, (ii) any repudiation of the Concession Agreement by
the Company, (iii) the Independent Engineer notifying the parties of a failure
by the Company to operate and maintain the Delhi-NOIDA Toll Bridge in
accordance with the operating practices laid down, (v) suspension by the
Company of the performance of its obligations under the Concession
Agreement for a period exceeding 90 consecutive days (except during the
subsistence of an event of Force Majeure), and (vi) any liquidation,
dissolution, winding-up, amalgamation, reorganization or reconstruction of the
Company so as to materially bring about a change in the ownership which has
a materially adverse effect on the project. In the event that NOIDA terminates
the Concession Agreement upon a Company Event of Default, it shall pay the
Company a sum equivalent to the aggregate of all sums due to the Lenders and
the costs of transferring the project assets after deducting the aggregate of any
cash reserves created for debt service obligations of the Company (provided
285
such reserves have been utilized for the purpose for which they was created)
and the proceeds from insurance.
The risk matrix is not defined under agreement but practically no risk is borne
by the NTBCL due to assured returns. The Government has equity in NTBCL
and hence any risk borne by NTBCL has impact on Government too. If
NTBCL has taken up any risk significantly that is financial risk (attached to
raising of equity and debt). But the lenders are safe guarded by Sovereign
guarantees for every event. Similarly in natural Force Majeure event ,the loser
is NTBCL for losing investment through equity but lenders are compensated
by Government and hence Government of UP & Delhi are attached to this
risk.
Table: V-10
Risk Allocation as Per NTBCL Concession Agreement
Commercial or Revenue Risk Government of UP & Delhi
Sovereign Risk Government of UP & Delhi
Natural Force Majeure NTBCL & Insurance (Debts Served By
Government)
Political Risk & Legal Risk Government of UP & Delhi
Indirect Political Events Government of UP & Delhi & NTBCL (Debts
Served By Government)
Time Overrun and Cost Overrun EPC Contractor
Project Risk Government of UP & Delhi
Financial Risk NTBCL
O&M Risk O&M Contractor
(Source: Derivedfrom Concession Agreement)
The concession agreement does not spell out the penalty payments or
sanctions on Concessionaire for not adhering to performance
specifications/standards. Such penalties are covered under agreement between
O&M contractor & Concessionaire
15. Lender’s Recourse: Pursuant to the terms of the Concession Agreement, the
Company has entered into an agreement (the “Direct Agreement”) with
NOIDA and IDFC, on 22 December 1998, for obtaining, holding and
enforcement of the security created under the various loan agreements entered
2S6
into by the Company with the Lending Banks and the Lending Institutions,
and other rights granted to the various persons providing secured or unsecured
credit facilities to the Company (“Lenders”) including inter alia, the Lenders’
Step-In Rights and the Lenders’ Rights to Appoint a Substitute Entity, as have
been granted under the Concession Agreement. Under the terms of the Direct
Agreement, IDFC, as a Security Agent, acting for itself and as agent for
Lenders, is entitled to exercise the Lender’s rights under the Concession
Agreement. The Company has undertaken that it shall be bound by the actions
taken by NOIDA or the Lenders or the security agent, IDFC, acting for or on
behalf of all the Lenders, in pursuance of or as a consequence of the Direct
Agreement. Further, NOIDA has consented to execution of a ‘consent and
novation agreement’ required by the Senior Lenders, at the request and to the
satisfaction of IDFC acting as security agent, for the due substitution of the
Company by a substitute entity and for the vesting of the Project and all
residual rights under the Concession Agreement with the substitute entity. Due
to this direct agreement, NOIDA assumes loan repayment to all lenders if
project does not generate sufficient cash inflow.
The Company, IDFC and IL&FS entered into the agreement for the purposes
of a takeout of the Deep Discount Bonds (DDBs) issued by the Company at
the end of the fifth year and at the end of the ninth year from the date of
allotment. Upon a takeout IDFC and IL&FS have the right to convert the
DDBs to a term loan or income bonds. IDFC and IL&FS are also granted first
ranking pari passu security with all the other Lending Banks and Lending
Institutions. In the interest of lenders, an agreement has been entered into
between the Company, IDFC, IL&FS (‘Take-Out Lenders”) and Karvy
Computer Share Private Limited for the purpose of facilitating the process of
the Take-Out of the Deep Discount Bonds by the Take-Out Lenders.
Additionally, if the Company commits a default in payment or repayment of

three consecutive installments, certain of the Lending Institutions (namely
IFCI, IDBI and LIC India) have the right to convert, at their option, the whole
of the outstanding amount of the loans or a part (such part, particularly in the
case of IFCI, not to exceed 20% of the loan amount disbursed), into fully paid-
287
up equity shares of the Company, at par. In addition, certain Lending
Institutions (namely IFCI, IDBI, IDFC and LIC India) are entitled to appoint
and remove, from time to time, one whole-time nominee director on the board
of directors of the Company. Thus IL&FS has detailed lender’s recourse but
finally the Government is liable for repayments.
not guiding for customer’s inconvenience. The CA sees that no bottleneck
conditions arise at project site and road surface is maintained at specified limit
of roughness. But value for money that is after paying for facility the user
actually is benefited or not is not ascertained.
17. Dispute Resolution Mechanism: The CA discusses role of consultants for
amicable resolution of disputed issues. The usual Arbitration tribunal (Indian
Arbitration and Conciliation Act 1996) is the last recourse as per agreement.
The concession agreement reviewed above is quite methodical to account the project
cost year to year, securing designated returns with full comfort to lenders. But due to
its inbuilt provision of secured rate of return, many planning and management issues
are faced by the company and the planners. The traffic, a common critical factor for
all BOT/BOOT projects has affected the cornerstones of the concession design that
stretches concession period indefinitely in absence of provision for cash transaction
upfront or during operations for deficit/surplus revenues in the project. However, it is
worth mentioning that today, NTBCL is the only listed toll road/bridge in India —
listed on both the local stock exchanges as well as the AIM (Alternate Investment
Market) Exchange, London. The equity shares of NTBCL are publicly traded in India
on the National Stock Exchange and Bombay Stock Exchange. NTBCL launched the
issue of global depository receipts (GDRs) represented by equity shares in March
2006. The GDRs of NTBCL are traded on Alternate Investment Market (AIM) of the
London Stock Exchange. Hence on financial front, NTBCL (effectively IL&FS) has
illustrated commercial strength of such projects supported by Sovereign guarantees.
288
Though exact financial plan/estimates at signing of concession are not available, what
has been implemented to construct and put the facility open to traffic is discussed
hereunder. Initially the debt structure proposed by the NTBCL was of around Rs 270
crores. This debt amount was raised to Rs.285 crores in financing the construction.
The major change was, Indian Financial Institutions and commercial banks were
given major role than thought before financial close
Table: V-ll
Original Debt Structure (1997-98) Proposed For NTBCL
Debt Source Debt Amount (Rs. in crores)*
World Bank line of Credit to IL&FS 71.43

(27%)
Deep Discount Bonds (DDB’s) 57.14
(Risk participation shared between IL&FS and (21%)
IDFC)
Multilateral Debt 71.43
(27%)
Indian Financial Institutions 47.62
e.g. IDBI, IFCI, (18%)
EPC Contractor - Mezzanine Finance 19.01
(7%)
Total 266.63
(100%)
* The fraction is due to original data available in USS.
** This attribute was proposed to gather Rs. 14.30 to 23.81crores and hence average of this
range is taken.
(source: IL&FS 2002)
The financial plan as per financial close is given under Table: V-12. The financing
structure of project is embedded with concept of back ended Deep Discount Bonds
that suits to long gestation period of such projects. The IL&FS has actually worked
like creating a holding Company for gamering equity from pure financial institutions
primarily based on Government guarantees and reasonably applied leverage over
equity funds.
289
Table: V-12
Financial Plan of NTBCL (Rs inCrores)
Debt Banks 114.0(40%)
Financial 61.7 (22%)
Institutions
IL&FS (World 60.0 (21%)
Bank line of Credit)
Deep Discount 50.0 (17%)
Bonds
Total Debt (70%) 285.7 (100%)
Equity Industrial Finance 5.0 (4%)
Corporation of India
NOIDA 10.0(8%)
O&M Operator 10.6 (9%)
Fully Convertible 20.8 (17%)
Debentures
IL&FS 36.0(30%)
Equity funds-I 20.0(16%)
Equity funds-II 20.0(16%)
Total Equity (30%) 122.4 (100%)
Total Funds (100%) Rs. 408.10
Total Project Cost envisaged at financial close Debt/Equity Ratio =

= Rs.414.O0 Crores 2.33 :1 or 70:30
(Source: 1L&FS 2002)
Another diversion in financing is debt anticipated from EPC contractor is (that is like
delaying cash payment to contractor) is avoided and equity support (i.e. partnership)
is assumed from Operation and Maintenance contractor. This is logical since O&M
contractor shall have long term association in the project. The estimated project cost
was Rs. 414 crores which was in general maintained at completion as detailed under
Table: V-13 hence, need to revise financial plan did not arise on this account. The
construction of project was completed four months ahead of schedule(i.e. within 25
months instead of 29 months) in January end 2001. This has reduced interest during
290
construction than it was estimated. The EPC contract was completed almost without
cost overrun. Hence, as far as construction portion of project cost is concerned,
though it is largest attribute, NTBCL could avoid cost overrun and achieved earlier
completion for such a large project.
IL&FS has been awarded a gold trophy at the hands of the President of India in 2005
for being the most Innovative Organization that has successfully implemented a
number of replicable and high impact infrastructure projects (including DND Flyway)
that are models for other Agencies to follow.
Table: V-13
Project Cost of Delhi-NOIDA Toll Bridge (Rs. in crores)
Attributes to Project Cost Estimated Actual
Engineering Procurement Contract(Main civil work) 215.48 205.33
Contingencies (including Inflation etc.) 40.29 45.81
Design supervision & management charges 11,24 17.33
Interest during construction 71.33 55.19
Environmental & social management plan - Land 10.14 11.67

/Rehabilitation &Reconstruction(R&R)
Other Expenses 66.38 81
Total 414.86 416.33
(Source: IL&FS 2002)
5.S.3.2 Financial Performance:
5.5.3.2.1 Poor Revenue from Toils:
The financial performance of any BOT/BOOT project will depend upon traffic
volume being served as compared to estimates. Like any Greenfield project, NOIDA
Toll Bridge Company Limited (NTBCL) promoted by IL&FS faced generic problem
with actual traffic realization vis-a-vis estimated traffic projections in initial years.
The Company attributed (NTBCL 2005) following reasons for this shortfall in
operations.
291
1. The major problem areas had been the shifting of growth impetus from
NOIDA to Gurgaon and non usage by commercial traffic resulting in lower
average revenue per vehicle.
2. General slow down in economy during FY 2002 and FY 2003.
3. Delay in commissioning of link of Ashram Flyover.
4. The major competition to Delhi- NOIDA Toll Bridge was (& remains) from
the parallel bridges viz. Nizamuddin Bridge and Okhla Barrage, primarily
because these are free to use. The Delhi- NOIDA Toll Bridge connects
NOIDA to Maharani Bagh in South Delhi across the river Yamuna. By 2006
there were 7 bridges connecting East Delhi and NOIDA to various other parts
of Delhi Among these 7 bridges, 2 bridges, namely, Nizamuddin Bridge and
Okhla Barrage materially influence the Delhi NOIDA Bridge. Nizamuddin
Bridge is approximately 3 km upstream of DND Flyway and the Okhla
Barrage is about 1 km downstream of DND Flyway. The Nizamuddin Bridge
and Okhla Barrage cater to about 135,000 and 85,000 PCUs per day
respectively (which is more than double of PCU per day handled by DND
flyway,
5. The average realization per vehicle was also lower than projected (Rs. 16
projected vis-a-vis Rs. 12) because of initial promotional discounts offered by
the Company to attract more traffic. The Company however is optimist about
growth potential for reasons like- emergence of major shopping and
recreational activities with the opening of the Centre Stage Mall/Multiplex in
NOIDA; various other recreational and commercial projects to be completed
in near future; existing BPOs and Call Centers have inspired major expansion
plans and new BPOs and other IT related companies in NOIDA; as per
Company’s estimate approximately 77,000 new dwelling units along the
NOIDA-Greater NOIDA Expressway and within Greater NOIDA are likely to
be constructed by 2009 end. Hence, Company conservatively estimated that
these dwelling units once fully occupied will provide an incremental traffic of
25,000 to 30,000 trips per day. The development of the Mayur Vihar District
Centre & commissioning of the Srinivaspuri Flyover would give positive
impact on the traffic on the DND Flyway. But till then, the Company faced
revenue shortfall right from inception. These losses had constrained the
Company from servicing its existing borrowings.
292
Table:V-14
Shortfall in Traffic As Compared To Estimated On Delhi-NOIDA Toll Bridge
Period Traffic (Million Vehicles) Total Revenues (Rs. in % (Actual
Lacs) revenue
Projected Actual Projected Actual on
projected
2000-01* - 0.91 - 11.60 -
2001-02 35.43 8.17 4666.00 1180.79 25%

2002-03 37.90 14.04 6467.00 1873.45 29%
*There were 53 days of operations in the FY 2000-01.
S.5.3.2.2 Financial Distress in Debt Servicing:
Evidently, after incurring project cost of more than Rs.400 crores the poor turn out of
traffic put the company in do ldrums. The Company had raised Rs 50.0 crores of deep
discount bonds (DDBs) through Initial Public Offering in October 1999 with an
effective annual interest rate of 16.3%. A total of 100,000 DDBs were issued by the
Company in November 1999 with a face value of Rs 5,000 each. Each DDB was
stated to have a maturity value of Rs 45,000 per bond in November 2015 (the maturity
value of all the DDBs being Rs 450.0 crores in aggregate). Pursuant to a “take-out”
financing arrangement made by the Company with IDFC and IL&FS, the holders of
the DDBs were given the option to sell the DDBs issued by the Company in
November 1999 to IDFC (60%)/IL&FS (40%) at predetermined prices of Rs 9,500
per bond at the end of 5th year i.e. November 2004 (at a yield of 13.7% per annum)
and Rs 16,500 per bond at the end of the 9th year i.e. November 2008 (at a yield of
14,2% per annum). In addition to this liability, the remaining debt portion (i.e. term
loans with banks, financial Institutions and World Bank credit) were carrying interest
payable at average 14.8% having about average 12 years of term. The project
accepted public money in terms of Fully Convertible Debentures (FCD) in addition to
DDBs through Initial Public Offering in October 1999. The Fully Convertible
Debentures received for equity carried 14% coupon rate with conversion period of 36
months from date of issue. The financial performance for initial years of operations
presented in Table:V-15is reflection of distress condition of NTBCL.
293
Table:V-15
Actual Versus Projected Financial Performance of Delhi-NOIDA Toll Bridge
(Rs. in crores)
Particulars As on 31.03.2002 As on 31.03.2003 As on 31.03.2004
Projections Actual Projections Actual Projections Actual
Total 50.75 11.8 69.86 18.73 82.51 25.86
Revenue
Total O&M 8.56 6.48 11.05 8.23 12.44 8.24
Cost
Gross Profit 42.19 5.32 58.81 10.50 70.07 17.62
Depreciation 2.03 6.18 2.25 6.33 2.50 0.16
Interest Paid 42.82 42.59 49.02 33.72 46.36 34.59
PBT -2.66 -44.98 7.54 -31.06 21.21 -18.64
Note:
1. The above projections were published by NTBCL in 1999-2000 for issue of DDBs.
2. while The Company has obtained an approval from Department of Company Affairs
for not charging depreciation for a period of 3 years (moratorium) w.e.f. 2003-04 on
the Bridge. No depreciation is therefore provided on the Bridge but other assets are
continued to be depreciated during this period. Depreciation was assumed under
Sinking Fund Method, while making the projections. However, the Company has
adopted Straight Line Method of depreciation
Owing to less than estimated traffic and high cost of borrowing, the Company
approached lenders for restructuring of debt through Corporate Debt Restructuring
(CDR) route. State Bank of India as a monitoring agent in consultation with the
NTBCL, IDBI and IL&FS prepared the debt restructuring proposal and submitted in
July 2002. The approval of Empowered Group was received in Oct-2002 & the
lenders have revised the terms of repayment and interest rate chargeable on the
restructured loan effective from date April 1st, 2002. Meanwhile, the company
recorded erosion of equity upto FY 2005 as illustrated in yearwise financial

performance and movement of long term resources in Table: V-16:A and B. The
same is depicted under Figure-V-3 and 4 also.
294
Table: V-16: A
Operational Performance of Delhi-NOIDA Toll Bridge
(Rs. in crores)
Operating
Financial Total Interest expenses Reported
Depreciation PBT
Year Income paid (excl. Int. & EPS(Rs.)
Dep.)
2001 1.3 4.97 0.88 0.82 -5.58 -0.63
42.6
2002 11.81 6.18 6.48 -44.98 -4.43
33.72
2003 18.73 6.33 8.23 -31.06 -2.34
2004 25.86 34.59 0.16 8.24 -18.64 -1.72

2005 31.74 37.36 0.23 9.12 -16.5 -1.35
2006 40.67 23.25 2.54 11.86 2.61 0.14
2007 49.12 18.07 7.8 10.86 11.06 0.59
(Source: Derived From NTBCL 200S& Annual reports 2005-06 & 2006-07)
The operational performance of NTBCL presented in Table:V-16:A and B reveal

huge interest charges and O&M charges as compared to project revenue during initial
years. For example, O&M charges in collecting the toll and maintaining the facility
were as high as 63% during FY 2001 and around 50% of total income in next two
financial years. Similarly, interest charges were almost four times of total income in
first two financial years and then from FY 2003 it started gradually reducing reaching
to one third of total income in FY 2007. This is condition of ramping up from lower
income facing higher obligations is expected when traffic is not realized as expected
and debt conditions are not flexible to match with stabilizing process of traffic. This is
basically representation of failure of envisaged financial plan of NTBCL (essentially
IL&FS).
295
Table: V-16: B
Movements in the Long Term Sources of Finance for Delhi-NOIDA Toll Bridge
(Rs. in crores)
Owner’s
Accumulated Misc.
Equity
net of P/L Exp.
Financial Secured (Paid up Adjusted
A/C carried Not
Year loans shares Net worth
to reserve & Written
+reserves)
surplus off
(1) . (2) (3) (4) (5) (6=3-4-5)

2001 249.09 101.62 -5.58 -7.36 88.67
2002 316.85 101.62 -50.56 -5.85 45.21
2003 331.39 122.40 -81.62 -4.33 36.45
2004 352.01 122.40 -100.27 -2.81 19.31
2005 358.51 122.40 -116.77 -1.30 4.33
2006* 323.52 311.68 -114.25 -11.19 186.24
2007* 186.0 330.56 -103.39 -9.94 217.23
Note:
a) In Year 2003, the FCD were converted in to equity shares & hence the increase in
equity was noticed.
b) In finding adjusted net worth on consolidated basis as available in under given

source, the Company has not considered reserve due to valuation amount of land
transferred to own subsidiary for development. The Company had during the year
2003-04 carried out revaluation of Land for 34 acres on NOIDA side (original cost
Rs 5,719,849 and written down value Rs 5,519,581 as on April 1, 2003) for which
the value has been increased by Rs 1,345,044,007. After obtaining approval from the
Shareholders and the Lenders, the Company had sold 30.493 acres of revalued land
to its wholly owned subsidiary in the year 2003-04 at the revaluation amount Rs.
102,99,50,327. This had been transferred from the Revaluation Reserve to the
General Reserve in the year 2003-04 as seen in Annual report for 2005-06.
* These figures are derived from annual reports based on Company’s consideration
not to take in to account land related reserves.
(Source: Derived From NTBCL 2005& Annual reports 2005-06 & 2006-07)
296
Figure-V-3
B Total Income H Interest paid S Depreciation ■ Operating expenses (excl. Int & Dep) a PBT
Figure-V-4
Movements in the Long Term Sources of Finance for Delhi-NOIDA Toll Bridge
RS. IN CRORES
□ 2001
B 2002
Owner's Equity Total funds Accumulated Adjusted Net B 2005

(Paid up shares owner's net of P/LA/C worth
112006
+reservesl) equity+secured carried to
loans) reserve & a 2007
surplus
297
5.5.3.2.3 Financial Restructuring of NTBCL:
Pursuant to the approved Debt Restructuring package, the Company has been bailed
out as per following terms of restructuring.
Z Reduction of the rate of interest to be paid to the Banks and Financial

Institutions but with following provisions. Thus average rate of interest to be
paid was reduced from 14.7% to 8.5 %. The restructuring facilitated debt
servicing by deferred interests.
S Bifurcation of outstanding loans of the FI of Rs.102.77 crores into two equal
parts: Issue of Zero Coupon Bonds (ZCBs) (Series A) and secured term loan
at 12.5%.Issue of Zero Coupon Bonds (ZCBs) (Series A) aggregating to Rs
51.385 crores to Financial Institutions against conversion of 50% of Term
Loan repayable in two installments (each of Rs. 25.69 crores) by March 31,
2005 and March 31, 2006. The Company paid first installment in 2005 but for
next installment due in 2006, it issued Offer Letter for rights shares in 2005
end.
Z For remaining 50% of outstanding loans of FI, it was structured as 12.5% term
loan to be repaid in quarterly installments from FY2010-11 to 2013-14. But
interest in cash payment at 4%, 8% and 11% per annum in first three years
respectively and then onwards 12.5% p.a. The balance interest of 8.5%, 4.5%
& 1.5% to be converted to a funded interest term loan and shall be paid
without interest in 2006-07.
S For Banks, the loans are restructured at an interest rate of 8.5%. For
outstanding bank debts of Rs. 133 crores, the restructuring required 16% to be
paid back to banks in 2005 & further 16% in 2006 and then in easier schedule.
The Company paid first 16% in 2005 and for next installment due in 2006, it
issued Offer Letter for rights shares in 2005 end. Here also, cash payment of
interest is payable for initial three years is @ 2%, 4% & 5.5% p.a. and at 8.5
% p.a. thereafter. Balance interest at 6.5%, 4.5% and 3% in the first three
years shall be funded by adding to the principal and repaid along with the
original term loan at 8.5% p.a.
Z Income from land development rights shall be used to repay the restructured
debt as well as sacrifice made by the lenders towards reduction in interest
298
rates. The repayment/redemption shall be affected out of the estimated
development income of Rs. 100 crores and would be shared between the banks
and FIs in the ratio of 48.6% & 51.4% respectively. Issue of Zero Coupon
Bonds (ZCBs) (Series B) aggregating to Rs. 55.5422 crores for the sacrifice in
the rate of interest differential to the lenders is provided herein. As per the
restructuring proposal these ZCBs shall be secured by way of first charge on
the surplus lands in the possession of the Company and development income
arising there from. The ZCBs will be redeemed in March 31, 2014 or earlier
only out of the realization of sale proceeds of the development rights of the
land adjacent to the DND Flyway over and above Rs. 100 crores.
DDB are payable in November-2015 but carry put option & hence applied
restructuring as below. Under the debt restructuring, there were two options
available to the DDB holders, to be exercised by 7th February 2006, namely:
Option I - DDB holders would be entitled to the contracted rate of interest of

13.70% per annum till the Appointed Date of 31 March 2002 and thereafter
the effective yield would stand reduced to 8.50% per annum. The bonds would
mature on 3rd November 2015 and maturity value of the bond would be as per
the revised interest. However, NTBCL would have the right to call/ purchase
DDBs from the holders at any time after effective date of 24th November 2005
with interest calculated @ 13.70% per annum till 31 March 2002 and at 8.5%
per annum thereafter up to the date of the payment.
Option II - Encashment of bonds by submitting the DDBs to the takeout

lenders (IL&FS and IDFC). This is as per the original takeout offer for the
first takeout i.e. 3 November 2004 (5 years from date of allotment) where the
takeout lenders would buy the DDBs at a predetermined price (subject to
deduction of tax, if applicable) on the first takeout date plus an interest @8.5%
p.a. for delay if any thereafter up to the date of payment.. All DDB holders
who opted for this option would be paid within the period of 60 days of the
Record Date.
As on 7 February 2006 the all the original DDB holders opted for the options
as follows:
299
TabJe:V-17
DDBs Redemption Exercised By NTBCL
Number of Bonds
Option I 10,815
Option II 52,087
DDB with the takeout lenders due to DDB holders 37,098

exercising Put Option on
November 3, 2004
Total 100,000
(NTBCL 2006)
■S The Company appointed M/s Wilbur Smith Associates (WSA) in mid 2001
(i.e. well in inception of shortfall) to undertake a comprehensive study of the
traffic in the catchments zone of the Delhi NOIDA Bridge Project with a view
to ascertaining both the reasons for the short fell between the projected traffic
and the actual traffic and to suggest network improvements which would
augment the traffic on the Delhi NOIDA Toll Bridge. Based on fresh traffic
counts and established traffic modeling techniques WSA concluded that the
total candidate traffic for the project was 69,000 vehicles per day as against
actual average of around 41500 (March, 2003) vehicles per day. M/s WSA
proposed the new feeder links to increase traffic on the Delhi NOIDA Toll
Bridge. The restructuring process insisted to take up these works by infusion
of Equity Capital.
The post restructuring scenario has shown quite expected results though yet lagging to
estimated values. The other than toll income has remained around 2.0 crore and hence
total operating income in Table:V-16:A essentially shows good rise in toll income.
However, the assured return of 20% is yet a liability to be borne by Sovereign as far
as operating income does not reach to post tax yield 20%. It is pertinent to mention
that the Company created a Wholly Owned Subsidiary Company, namely, DND
Flyway Ltd during the year 2003-04 after obtaining the approval of the Lenders as
well as Trustees to the Debenture holders and the Shareholders of the Company for
commercial exploitation of land appurtenant to the Bridge in case of shortfall in
revenues. Delhi NOIDA Link Bridge includes value of Land appurtenant to the
Bridge on both sides of Delhi and NOIDA measuring 65 acres of land in Delhi & 34
acres in NOIDA. After obtaining approval from the Shareholders and the Lenders, the
300
NTBCL had sold 30.493 acres of revalued land to its above said v^jiojly owned
subsidiary in the year 2003-04 at the revalued price of Rs. 102,99,50,327 and the
same amount was transferred from the Revaluation Reserve to the General Reserve in
the year 2003-04. But practically commercial benefits of this land to the project are
yet to be exploited and hence the provision of such land development under BOOT
has not really worked so far even by year 2007.
To reduce the debt servicing and hence to deleverage the Company and to meet the
cost of Mayur Vihar Link (a feeder link to supply traffic to project), the Company
launched a Global Depository Receipts (GDR) in the UK market in the month of
March 2006 to raise new equity capital through 11,363,636 GDRs (each GDR
representing 5 Ordinary Shares of Rs 10 each). The GDR was placed for US$ 45
(equivalent @ Rs. 200 crores) with following plan for use of net proceeds(after
deducting expenses) : US$11.3 million (Rs 501.5 million) to repay and prepay term
loans falling due on 31 March 2006; US$23.2 million (Rs 1,032 million) for the
prepayment of loans to reduce interest costs along with any agreed prepayment
charges; and US$7.9 million (Rs 350 million) to fund the construction of the Mayur
Vihar link to the Delhi-NOIDA Toll Bridge. The construction of the Mayur Vihar link
could not be commenced before June 2006 in want of approvals; the Company
reportedly used all these funds for the repayment and prepayment of loans (NTBCL
Admission Report 2006 and NTBCL 2006).
The GDR proceeds could fetch Rs. 56.82 crores in equity and in April 2006 additional
equity at 10% of this amount was received from overpayment money to GDR issue.
The Table: V-18 narrates equity infusion after March 2005 that is from Rs. 122.4
crores as per financial plan. The equity infusion is evidently dominated by Global
Depository Receipts (GDR) & remaining is Employee Stock Option wherein shares
have been granted to directors, senior executive and general employees.
301
Table: V-18
Equity Infusion as a Restructuring process of NTBCL
Equity No. of Equity Cumulative Rise over Total
Infusion Shares (Rs. infusion equity Rs. equity as per
through 10.0 each) & Rs. financial plan
Date of (Rs. 122.4 crores)
Allotment
Issued 4,76,000 No. 47,60,000 1,22,87,60,070 0.4%
pursuant to August 10,
Employee 2005
Stock Option
Plan 2004
Issued 7,03,500 No. 70,35,000 1,23,57,95,070 0.6%
pursuant to October 18th,
employee 2005
stock option
plan 2004
GDR [US$ 56,818,180 56,81,81,800 1,80,39,76,870 46%
equivalent No.
0.225) 21 March 2006
Issued 15500 No. 1,55,000 1,80,41,31,870 0.01%
pursuant to 29 March 2006
employee
stock option
plan 2004
As received 5,681,815 No. 5,68,18,150 1,86,09,50,020 4.6%
from over 10 April 2006
allotment to
GDR
Issued 100,000 No. 10,00,000 1,86,19,50,020 0.08%
pursuant to 9 May 2006
employee
stock option
plan 2004
Total Rs. 63,79,49,950 i.e. Total Rise in equity =51.69%
(Source: Derived From Annual Reports NTBCL)
Owing to reduced debts and increased equity the Debt/ Equity ratio changed
dramatically as illustrated in Table:V-19. As shown in Table:V-19 basically the
funding of NTBCL changed from project recourse debt financing to equity based
funding just within first six years of operations. The owner’s funds have risen from
28.98% from first year of operations (i.e. 2000-2001) and grown to 64% by 2006-
2007. Alternatively, Debt/Equity ratio has reduced from 2.45 (FY 2001) to merely
0.56(FY 2007). Hence, the actual operations proved the financial plan chalked out by
financial wizards of IL&FS inadequate right from onset and the relief was found
when restructuring of debts was made associated with substantial deleveraging.
302
Table: V-19
Leverage Ratio for Delhi-NOIDA Toll Bridge
Financial Year Debt/Owner’s Debt/Net worth Owner’s funds as
Equity Ratio Ratio a % of total funds
2001 2.45 2.81 28.98
2002 3.12 7.01 24.28
2003 2.71 9.09 26.97
204 2.88 18.23 25.80
2005 2.93 82.80 25.45
2006 1.04 1.74 49.07
2007 0.56 0.86 63.99
(Source: Derivedfrom Table:V-l6:B)
S.5.3.3 Analysis of Issues Due To Lacunae in Concession Agreement:
Though the approach of IL&FS was award winning, pioneering and innovative while
making ground for private sector participation in infrastructure with long term
financial obligations, certain provisions were actually too much securing interests of
private parties. Hence, following points are raised from study of concession
agreement and available relevant details for its practical implication in construction
and operation. The lacunae pointed out in this CA are leading to suggest appropriate
corrections for fixture works.
1) In fact IL&FS managed to set up NTBCL in Aprill996 but it took one and
half year to sign concession agreement with Government (November 1997).
For achieving financial close, NTBCL took further twelve months (October
1998) but CA did not focus on such delays.
2) At broad level, the CA for Chalthan ROB and NTBCL both are designed
assuming some returns on total investments. The Chalthan case assumed 18%
rate on outstanding project cost but did not assure returns on any aspect of
project. Here, 20% of return on residual project cost every year is assured.
Looking from financing perspective, the provision of assuring returns is more
relevant when private debt comes in to play which is not the case here. As a
simple principle, when private equity is pumped in to project capital, the
private sector hopes that revenue will exceed forecasts arid returns yield
greater than expected. This in turn transforms the project genetics from entity
tasked to provide a public good (may be tolled) to one that wants to maximize
profit. Hence, equity participation from private sector vis-a-vis private debt is
303
the critical decision in framing the project. But the planners did not
differentiate these two diverse sources of funds in stipulating the sources of
funds. Virtually, the CA is silent over debt component.
3) The provision of designated fixed post tax returns at 20% has remained
cynosure for allowing risk free operations but providing no incentives for
efficiency and economy from private sector. More importantly, returns are
calculated on total investments (debt plus equity) that is total project cost in
this project. This assurance has benefited NTBCL due to nondiscrimination
over debt and equity sources. The company started with heavy debts with
average costs at 14.7% and hence net of 20% minus 14.7% was available as an
extra benefit to the company on debt component. Hence, 70: 30 debt: equity
could yield actual4 benefits of 23.71% that is more than 20%. Since the
benefits are compounded in early years of operation owing to shortfall in
revenues to cover up the designated returns, the actual benefits are excessive
in terms of stretching the concession period beyond specified 30 years. As per
CA, the returns at 20% shall accrue through operations only and hence it
requires extension of concession period for shortfall in assured returns.
4) The uncapped definition of project cost is like cash contract wherein so far
Government was able to vary the cost as per day to day requirements subject
to certain (irrespectively of efficiency factor) approvals. The cost overruns are
typical for cash contracts. Here the Independent Engineer (IE) and
Independent Auditor (IA) are playing role to confirm any costs to be added to
the project in most technical and reasonable manner but in absence of capping,
the actual cost of completion is subject to huge variation. The exact costing
and expenditures are not accessible to verify any gold platting of project if any
existed. But some issues are like, “Other Costs of Commissioning” is too
liberal term under CA and many cost related to Government transaction also
added to project cost. The net preoperative expenditure incurred during the
construction period (i.e. up to 7 February 2001) was Rs. 19,679.50 lacs.
Subsequently, the Ashram Flyover i.e. one of the link to main project was
opened to the public for traffic on 30 October, 2001 for which a separate
agreement was entered into with the Government of the NCT of Delhi which
is co-terminus with the main Concession Agreement. Costs incurred on this
project were also subsequently capitalized W.E.F. 30 October, 2001. All
304
expenses incurred from 8 April, 1996 (the date of incorporation of the
Company) up to 7 February 2001 (the date when the bridge was opened to the
public) were capitalized as part of the bridge and other assets (NTBCL 2005 &
2006). There is no incentive to minimize costs (i.e. cost of EPC, periodic
maintenance and operational costs) since costs are completely passed on to
road users. The assured return on such open ended understanding of project
cost could lead to endless tenure of this BOOT concession.
5) The restructuring of NTBCL has effectively helped in reducing the cost of
debt funds but the losses of lenders are compensated. It is not clear if it has
been added to the outstanding project cost. Most striking is, the CA is not
providing any sharing of such gains by State body from refinancing.
6) The project has invited severe criticism from Planning Commission itself
(Pargal 2007). A study for Planning Commission has estimated that if there
are no returns during the first four years, the addition of the deficit in returns
(i.e., 20% of total project cost) to the initial project cost of approximately Rs.
408 crores (US$ 100m) would result in the total project cost that has to be
covered more than doubled, i.e., exceeding Rs. 816 crore (US$ 200m). Now
returns of 20% would be payable thereafter on this revised (enhanced) total
project cost. Pargal has noted that the Independent Auditor have already
determined accrued return as designated under the Concession Agreement and
such amount due to the Company till March 31, 2006 is reported amounting to
Rs. 9,533.92 million (US$ 234m) as on March 31, 2006, inclusive of project
cost. Pargal has quoted the AIM Admission Document (2006) wherein the
Directors estimate that the concession period would be in excess of 70 years,
as a result of the shortfalls in the recovery by the Company of the Total
Project Cost and the Returns to date. Starting with a Total Cost of Project of
Rs. 953.4 crores in 2006, the Admission Document reports even if the entire
operating surplus were allocated to payment of returns there would still is a
shortfall in returns each year, with the result that the total project cost in 2021
could be about Rs. 11,817.54 crores. Hence Pargal foresees this concession in
perpetuity unless significant Development Rights or increases in toll rates or
both are granted. And in fact the concessionaire has requested the grant of
Development Rights under the concession agreement and has received ‘in
principle’ approval for the same. The DND Flyway Limited, a fully owned
305
subsidiary of NTBCL, was incorporated with the object of carrying out
development activities on the surplus land around the Delhi NOIDA bridge so
that the issue of pending returns could be sorted out. Pargal observes, the
transfer of the land to DND Flyway Ltd which is not party to the concession
agreement, makes it unclear whether NOIDA can ensure that the benefits of
real estate development will be applied for reduction in the total project cost of
the bridge for purposes of returns and repayment.
7) Second noteworthy comment from Pargal is similar to what is analyzed for
actual rate of return in early Para of this subsection. She has also questioned
rising returns on equity in case of deficit in return on project cost is observed
and compensated. She illustrates supposing that debt was 70% of the total
capital cost of the project with a capital base of Rs. 100 crores and a rate of
interest of 14.7% per annum, the interest payment due the first year would be
0.14.7*70 - Rs. 10.29 crores. Now, out of the total return on capital cost being
Rs. 20 crores (20% of Rs. 100 crores), Rs. 9.71 crores would be available as
return on equity, which amounts to a rate of return of approximately 32% to
equity (Rs. 9.71 crores on an equity base of Rs. 30 crores). Under these
circumstances, the reduction of cost of debt from 14.7% to 8.5 % effected by
debt restructuring would further add to return on equity. Assuming a capital
base of Rs. 100 crores and retaining a 70:30 debt to equity ratio, Pargal notes
that the interest payment due would now be Rs. 0.085*70 = Rs. 5.95 crores.
Thus, of the total return on capital cost of Rs. 20 crores (20% of Rs. 100
crores), Rs. 14.05 crores would be available as return on equity, which
amounts to a rate of return of approximately 47% to equity (Rs. 14.05 crores
on an equity base of Rs. 30 crores).
8) The CA is similarly not capping toll rates or toll period. The CA states that
NTBCL can determine, demand, collect, retain and appropriate a Fee from
users of the Delhi- NOIDA Toll Bridge and apply the same in order to recover
the Total Cost of Project and the Returns thereon. The outcome of this
provision is summarized under Table:V-20. As shown in this Table, toll rates
are basically driven by motive to match up with financial constraints & it is
approved by Fee Review Committee which is comprised of one representative
each of NOIDA, the Concessionaire and a duly qualified person appointed by
the representatives of NOIDA and Concessionaire who shall also be the
306
Chairman of the Committee. The hike in toll rates is in excess of CPI growth
(which is average 7 to 8% per year) & the Committee is empowered to
approve so.
Table: V-20
Hikes in Toll Rate as compared to base rates (1996) on DND Flyway (Rs/Trip)
Class 2001 2002 2003 2004 2005 2006

Two Wheelers 40% 40% 60% 60% 60% 80%
Cars/Jeeps/3W 50% 50% 50% 60% 70% 80%
LCV 50% 50% 50% 50% 75% 75%
Buses/ Trucks 17% 17% 33% 33% 33% 50%
Note: base toll rate for large & extra large vehicles seems containing error in source
data and hence hike for them not derived here.
(Source: Derived From NTBCL Traffic Study 2006 and NTBCL 2006)
9) The NTBCL provides toll paying facility through Electronic Toll Collection
(ETC) system and also through transponders called On Board Unit (OBU)
which is more sophisticated. The NTBCL offers discount on use of such mode
of payments. The revenue shortfall and excessive operational cost are passed
on to the user as provided in CA.
10) The basic difference between Build- Operate-Transfer (BOT) & Build- Own-
Operate-Transfer (BOOT) is provision of development rights under CA. In
case of revenue shortfall NTBCL can invoke development rights for which
project assigned 65 acres of land in Delhi & 34 acres in NOIDA. The land
development potential in this project is enormous as compared to typical land
available under rural regions of highways. A major benefit of such clause is
that Concessionaire need not wait for extension of Concession term to adjust
for revenue short fall. But CA is not mentioning any formula/method to
correlate revenue shortfall with type and level of development of such land.
Economists refer it as matter of Eminent Domain whereby Public body
maintains right over land use & transaction. Keeping the public sector in
charge of eminent domain decisions is one way to ensure that the public
interest is being served. Here, the land is not developed in right time which in
turn increased revenue shortfall (to be borne by Government) & probably land
is hold for speculations which shall not be a planner’s choice.
307
11) NTBCL can restrict the use of the Delhi- NOIDA Toll Bridge by pedestrians;
cycle Rickshaws etc from the Delhi-NOIDA Toll Bridge. This stipulation
spurs issues of equity in benefits of such projects.
12) Once the targeted return has been achieved, the project facilities would revert
to NOIDA for a nominal value of Re.l. The Independent Engineer has
certified the useful life of the Delhi- NOIDA Toll Bridge as 70 years. But the
CA is not relating concession period with economic life of the assets. The
design of CA with longer span of CA will have different economics which is
not materialized in this project however; the assured returns are pushing the
future of this project towards the same length concession period.
13) As far as risk allocation is concerned, the concession design has been too
secured for NTBCL. The CA is fully relieving the Concessionaire of
commercial risk by assuring returns. Practically, due to assured returns,
NTBCL (or in broad sense IL&FS) has almost got inbuilt caveat ( it is more
than State bailouts) to shun any losses due to such risks. Hence rhetoric
argument of distributing risk to them who can manage it best is not realized.
For example, if it is time overrun, the IE/IA will decide the causes and cost
implications. If it is Force Majeure, EPC contractor will be allowed to ran
delayed with cost to ultimate road users (Public) and any design change is
admissible to get extension of time from IE/IA. Practically, it is easy to claim
on either ground for extension of time and if approved, EPC contractor can
avail price escalation due to such delay and his own prolongation cost.
14) In the event NOIDA decides to repudiate the agreement, it would be obliged to
pay the concessionaire an amount equal to the total project cost and returns
thereon outstanding till the termination date. The spiraling of project cost with
pending returns makes NOIDA more & more impossible to end the agreement
from Public side as time passes. Similarly in case of termination of agreement
in the event of Concessionaire’s default, during construction stage or
operational stage, NOIDA is anyway liable to pay back lenders with due
interest. Thus during construction, Concessionaire is relieved of construction
risk to large extent.
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15) The users are viewed as customers of a commercial service. Because, the
concession design is no where putting user’s recourse at the stake. A planner is
expected to design concessions on public utilities that costs minimum to the
public. This aspect is absolutely missed in the framing of this PPP Concession.
16) Though the toll period is very lengthy (at least 28 years), CA is not allowing
any review and it expects continuation of terms of CA. The Government is
part of such framework and Public is quite away from Project structuring in
rush for assuring specified returns.
17) The Concession Agreement for this project was signed on November 12, 1997
but the concession for the Delhi- NOIDA bridge project was not awarded
competitively as evident from CA. The Steering Committee decided that the
Project should be implemented by a corporate entity promoted by IL&FS and
incorporated in the State of Uttar Pradesh for the purpose of developing and
implementing the Project. The complexities arise from the feet that IL&FS
had multiple role of- Sponsor; Concessionaire; to considerable extent Lender
who has very good recourse in agreement and it has remained most
influencing party in design and implementation of project. These express
conflicting roles among themselves and even cash contracts executed by
Government avoid such interface. Similarly, the NOIDA or UP Government
has been prevented from acting as a public oversight body by accepting
conflicting business partnership with IL&FS. Actually role of Sovereign
under PPP projects needs due isolation from private concern to keep alive
Public concern.
5.5.4 Policy Implications from Case Study:
The design of concession agreement for PPP projects has never been simple stroke as
experienced by planners world over. As far as long term concessions are concerned,
the confusion and controversy surrounding long-term concession agreements has
surfaced world over because they have been promoted as silver bullets, as essentially
free money provided by the private sector that will not require new taxes or fees. The
concession approach to project financing has many advantages over traditional
methods and as many concerns with these nontraditional techniques. Buxbaum and
Ortiz (2007) have noted that at this point, very few people have a complete picture of
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the short- and long-term implications of different approaches and elected officials are
bombarded with ideologically laden lobbying from both sides. However, the long
term concession agreement or Public Private Partnership (PPP) has emerged as a
potential source of significant new revenue for transportation. Perhaps it is in the
nature of toll road concessions that they rarely turn out to be financially dull. More
often than not, they are either extremely profitable, or are financial failures (Mayer
2007). In a ran behind this new source of revenues, the concession is designed to
avoid extreme profits or financial failures to concessionaire. Consequently, the
structure of this project is such, any inefficiency or shortfall at any actor or
stakeholder level can in general simply add up in the project cost to be recovered at
given point of time rendering it a risk free project. The working of this concession is
depicted in a conceptual model developed under Figure: V-5. As shown in this figure,
the Government signs Concession Agreement with a SPV to invite upfront payment
for construction of facility. Now SPV (that includes Government also) behaves like
Sovereign and engages civil contractors for construction and maintenance on cash
contract basis. Every gain due to efficiency of various stakeholders shall affect the
project cost and hence tolling regime for road users. The CA is transferring every risk
ultimately to Government or making liable public to longer period of toll period to
recover project cost at assured rate of returns. Even the debt obligations to lenders are
indirectly guaranteed by Government.
310
Figure: V-5
Project Structuring Of NTBCL under Rate of Return Regulation
Correction Suggested:
Review of concession
for assuring investor’s
interests and
safeguarding Public
interest
The schematic presentation of NTBCL concession design is provided with suggested

correction in dotted box. The suggested correction is for incorporating periodic review
of concession operations to safeguard investor’s interests without surrendering Public
interests. The scope for such review is discussed hereunder which require to
understand structural mechanism of this CA.
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5.5.4.1 Cornerstones of NTBCL Concession:
In above model, the concession design is found resting upon three comer stones.
These are - Project Cost; Traffic Volume and Tolling Terms (Toll period and Toll
levels).
Figure: V-6
Cornerstones of NTBCL Concession Agreement
(Source: Conceptualized From This Case Study)
Here, unlike Chalthan Case, traffic growth, toll period and toll rates are linked to
recovery of project cost which it self is variable. Hence, a cyclic reaction as shown in
Figure: V-6 decides fate of Public who pay tolls at rates and for period suitable to
residual project cost of NTBCL. The PPP project of Chalthan ROB was not only Price
Capped but also Toll period capped. But such cappings together exposes the
concessionaire to those uncertainties mainly traffic which is having public nature but
not under control of Government. It is worth discussing all three cornerstones for their
role in concession design under Rate of Return regulation. Since it is expected that
MCA (2006) will be most widely used in road sector under PPP route, the MCA
(2006) is also discussed for comparative analysis.
Project Cost: The project cost is very important in Rate of return based regulations.
In fact MCA (2006) has also touched this aspect by providing capital grant/negative
grant that an entrepreneur will need to achieve his desired returns under Price Cap and
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toll period cap regulations. The CA prepared by IL&FS is really Methodical in
recognizing importance of project cost for securing the returns. Every possible
variation in construction and operation is suitably accommodated in outstanding
project cost of NTBCL. The recognizing of project cost relieves the concessionaire
for establishing any claim for losses in estimated gains and vice versa for leveling in
gains if Government wishes. The MCA is not considering project cost as parameter of
attention once the project is awarded. The project cost is met from debt and equity
sources but neither IL&FS nor MCA (2006) discriminate for these two different
sources of funds. As seen in case of NTBCL, the highly leveraged financial plan was
reduced to highly equity funded project. If the financial base case was prepared with
due care to leverage gradually as the project revenues were capable to take up the
interest charges, it was in interest of project and Government that was missed in
concession design. It is suggested that the sponsors of concession shall have own
estimates of financial plan for estimated project cost so that debt/equity proportion
could be guided atleast during earlier “Ramp Up” period before reaching a smooth
level ground of operations. For loaned funds, indexation like price escalation paid in
civil costs shall be exercised to monitor the actual costs of funds to the
concessionaire. This will require good base work from Government using techniques
like sensitivity analysis for arriving at probable base case scenario with estimated debt
and equity mixture on year to year basis. The detailed work like this can put the
sponsors in a capacity to negotiate for best deal in Public interest. These suggestions
are applicable to both - Rate of Return and Price Cap regulations.
Traffic Volume and Growth: While running behind this new source of revenue, a
fundamental question is worth repeating that was raised for Chalthan ROB case-
“How wise it is to keep concession business a speculative business by transferring
traffic risk on private investors?” The traffic has less of commercial character than
Public owing to Public nature of commodity itself. Hence, it sounds reasonable to
decrease the traffic risk so that cost of funds can be expected to be lower and hence
discount rates required by the concessionaire could be lowered. The MCA (2006) has
embedded this aspect partially and has accepted frill monitoring of actual traffic as
compared to estimates. The NTBCL has not guaranteed traffic but has opted for
assured returns and hence made all three cornerstones to act in a (vicious) cycle and
all inefficiencies are also coming in to play. Keeping in view these observations, it is
313
suggested that a concession shall incorporate atleast partial traffic guarantees for
initial years of operations for Rate of Return and Price Cap regulations. Only matter is
how these guarantees are converted in to lower cost to Public. There should be a
negotiation for the guarantees hence the financial base case prepared by bidder shall
be with and without such guarantees. The MCA (2006) (which is basically a Price
Cap based model) incorporates provision of capital grants and revenue short fall loans
but that is not intended to curb the traffic speculations in the design of concession
agreement. As a standard sensitivity analysis practice, 15% of variation in traffic
count for initial years or in gradually decreasing basis traffic guarantee is suggested as
required case to case basis depending upon base case requirements. These will require
monitoring of traffic volume that is hitherto neglected by Government and meaningful
preparation of base case for its periodical review.
Toll Rates and Toll Period: The Government is generally fixing toll rates as per
actual saving in Vehicle Operating Cost due to said improvement in service standards
at feasibility level. The simple NH Fees Rules(1997) are based on these calculations.
At feasibility level, willingness to pay such tolls is generally ascertained. When the
toll rates are revised, IL&FS has opted for Consumer Price Index whereas NH
segment of GOI uses Wholesale Price Index. In fact Government shall insist on
indexation of tolls on WPI basis rather than retailer level CPI. More importantly,
actual benefits to users for proposed revision of fees shall be cross checked for
rationalization of increase in this burden to users. Such User’s recourse shall be
embedded in the concession design.
Regarding toll period, it is worth to consider economic life of structures in fixing toll
periods. As per present policy, after transfer of assets to Government under
BOT/BOOT format, Government continues departmental tolling but then operations
and maintenance again falls prey to the efficiency of Government. A case of NH-8
BOT project for construction of additional bridge on River Mahi Sagar is noteworthy
here.
An additional two lane bridge was built on NH-8 near Vasad on Vadodara-
Ahmedabad Stretch using BOT format. The estimated project cost was Rs.42 crores
and concession period of 95 months was approved by MOSRT&H in 1997-98. The
concession agreement did not provide price escalation for tolls and hence base tolls
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were fixed for fall concession period. At the end of concession period, NHAI took
over the facility and applied tolling based on NH Fees Rules (1997) but with
escalation from retrospective effect. The users faced steep hike in fees without
addition to their benefits as detailed in Table:V-21.
Table: Y-21
Toll collection on Mahi River Bridge on NH-8
Sr. Month of Collection Amount of average Remarks
No. daily toll collected
(Rs. in Lacs
rounded off)
Toll Rates For BOT agreement: Car/Jeep= Rs.10.0; LCV= Rs. 20.0 Bus/ Truck =
Rs. 25.0 MAV= Rs. 75.0
1 Average of Jan06 to Dec- (4.19+4.6+4.35 Toll collected by private BOT
06 +4.43+4.5+4.2+ project concessionaire (toll
Note: lowest of year= 3.66+2.87+3.2+ period of 95 months ending in
2.87 lac s per day in Aug 3.64+4.2+3.93) December 2006) who
06 & highest in Feb /12=3.98 collected tolls at constant
2006=4.6 lacs per day rates without even inflation
based rise
2 October 2006 3.64 -do-
3 November 2006 4.2 -do-
4 Dec 06 (Up to 3.93 -do-

18-12-2006)
5 January 2007 3.45 NHAI Operations with same
toll level
6 February 2007 3.52 -do-
7 March 2007 3.45 -do-
8 April 2007 3.44 -do-
9 May 2007 3.68 -do-
10 June 2007 3.80 -do-
11 July 2007 3.00 -do-
12 August 2007 3.00 -do-
Toll Rates Revised By NHAI(Sept 2006) Car/Jeep= Rs.20.0; LCV= Rs. 55.0 Bus/
Truck = Rs. 75.0 MAV= Rs. 155.0
13 September 2007 9.45 NHAI raised toll level for
all vehicles.
14 October 2007 9.55 NHAI Operations
15 November 2007 8.60 -do-
16 December 2007 9.57 -do-
17 January 2007 9.00 -do-
(Source: Collectedfrom GOG & NHAI Offices)
Hence the toll collection enjoyed by a private BOT project concessionaire could not
be achieved by NHAI when toll level was same. The NHAI could not reach the yearly
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average of Concessionaire’s toll collection before raising the rates. The BOT project
concessionaire reported recovery foil project cost with constant toll rates but NHAI
t
raised toll by 100% to 200% under the provision for tolling permanent bridges on
national highways within nine months from taking over. Had MOSRT&H agreed to
some of the claims .of Concessionaire and extended the toll period under the provision
of agreement, the road users could have kept on paying at agreed toll rate of
Concessionaire.
Right from inception of BOT projects and in MCA (2006) also, Government has set
policy to relieve the concessionaire at earliest through smaller toll period. Perhaps due
to public nature of road sector, Government is not willing to hand over assets to
private concern in perpetuity or longer terms. Keeping in view need of life time
modifications and periodical repairs, it is hereby suggested to adopt longer concession
period with periodical reviews of performance and user’s concern. The concession
can be periodically put to rebidding with preemptive offers to original concessionaire
in order to incorporate modifications in facility and benefits of competitive pricing to
the users.
5.5.42 Remedy To NTBCL Concession Agreement:
Eduardo Engel, Ronald Fischer and Alexander Galetovic ( 2005) have observed that
where the Government guarantees a level of toll revenue, they weaken the incentives
to screen projects for white elephants, because firms do not bear the costs of investing
in bad projects. Second, guarantees shift obligations to future periods and
administrations (by extending toll periods). These contingent liabilities are seldom
valued, and they are typically not included in the year-to-year budget or counted as
Government debt. Engel et al.( 2005) feel that it is therefore tempting for politicians
to give generous guarantees to stimulate investments, collect the political benefits and
then pass the bill to fixture administrations. The remarks of Engel et al. ( 2005) are
very much sensible for NTBCL case.
Keeping in view then circumstances of PPP environment, concession agreement for

NTBCL can be understood as a stepping stone for further development of PPP with
amendments in balancing manner. But the basis flaw in planning of this project was
avoidance of competition for the field which is suggested after understanding the
316
problems with this project. The efforts of Government and IL&FS were pioneering
but after passage of decade, the concession can be exposed to market forces to
stimulate competition for the field and hence Demsetz auctioning of project
economics is suggested as a remedy. The concession granted to NTBCL was based on
Rate of Return regulation and hence if project cost at designated return is paid back,
the concessionaire can be relived and amended concession agreement can be
introduced. It is beyond doubt that the NTBCL has set toll levels using discretionary
powers provided by CA. The perils envisaged by Demsetz are apparent in this case
which requires establishment of user’s recourse as an outcome of this exercise. After
debt restructuring, the project is earning satisfactorily through toll operations alone
but still lagging to catch level of assured 20%. Thus neither road users, nor
Government is comfortable during tenure of this CA atleast going to last up to year
2030. The CA for NTBCL has severe flaws and any delay in curbing ever-increasing
residual project cost could mean perpetually vesting the assets and lucrative chunk of
land to private concern that has no user’s recourse. If the concession period is
prolonged to cover even 75% of economic life (that occurs when concession ends
around year 2050) huge recurring cost is expected that will stretch the concession
further with new issues. As a prudent practice, it is suggested to end such agreements
by paying back dues as per agreement. This is feasible through re-auctioning of
concession looking to the potential of future cash flow estimated by the company
using international consultancy services.
5.5.43 NPV of Future Cash Flow & Future Financial Management:
Halcrow (a consulting firm appointed by NTBCL) has derived cash flow from 2006 to
2021 because the issue of GDR in March 2006 was to carry tenure of 20 years and
Halcrow was keen to establish that Project was worth investing looking to cash flow
from 2006 to 2021 (NTBCL Traffic Study 2006).
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Table:V-22:A
Cashflow Statement projected by Halcrow up to 2021(Rs. in million)
Year Toll Total Income Operating Total Capital Net
ending Revenue O&M Tax/MAT Surplus and Periodic Cash
31st Cost Expenditure Flow
March (Overlays)
2006 353 104 0 249 0 249
2007 421 109 0 312 300 12
2008 553 131 4 419 0 419
2009 671 140 18 512 51 461
2010 791 150 26 614 0 614
2011 912 161 37 714 0 714
2012 1085 173 50 863 0 863
2013 1225 185 60 981 0 981
2014 1376 199 70 1108 69 1039
2015 1505 213 71 1222 0 1222
2016 1674 228 84 1362 0 1362
2017 1854 245 98 1511 0 1511
2018 2043 263 122 1658 0 1658
2019 2227 282 136 1809 92 1718
2020 2419 302 150 1966 0 1966
2021 2621 324 719 1577 0 1577
NPV at 9.5% discount rate for cash flow from 2008 up to 2021 is calculated by
Halcrow at Rs. 7450 million
Source: NTBCL Traffic Study 2006)
Assumptions of Halcrow:
1. Toll rates are escalated at 6% per annum which is a conservative assumption

since CPI has grown at 7.7% during 1991 to 2005.
2. O&M escalation is considered at 8% per annum.
3. The construction schedule for the Mayur Vihar link is being considered for 9
months, such that this facility is operational from 1 January 2007.
4. Income tax as 30 % of base rate, surcharge of 10 %, education cess of 2 %,
effective rate of 33.66 %, minimum alternate tax of 7.65%. The project being
in the infrastructure sector covered under section 80IA of the Income Tax Act
318
is eligible for a tax holiday for a continuous block of 10 years to be opted by
the Company within the first 20 years. The NTBCL is carrying forward
significant amount of business loss and unabsorbed depreciation, there will be
no tax payable till FY 2010. The Company is assumed to benefit from the tax
holiday during the period FY 2011 to 2020 (years 11th to 20th from start of
operations) and only MAT will be payable during this period. Tax at normal
tax rate has been provided in FY 2021. The rate of depreciation for tax
computations has been assumed @ 10% per annum on written down value
basis with a salvage value of 5%.
5. The periodic overlay expenses has been escalated at the assumed rate of CPI
inflation i.e. 6% and establishment and other O & M expenses of the Company
have been projected using the estimated costs for 2006 provided by the
Company as the base with an annual escalation of 8% per annum.
6. Discount rate used for the DCF analyses is the cost of capital of the Company
& is derived as below by Halcrow. The cost of equity for the Company has
been determined using the capital asset pricing model. The prevailing yield on
the 10 year G-Sec has been taken as Risk-free rate which works out to 7.2%.
The Market return is determined by averaging the annualized growth rate in
NSE Nifty and BSE Sensex over last 10 years which works out to 10.75%.
The beta (P) for the Company is 0.91. Thus cost of equity is worked out to
approximately 10.5% by Halcrow. Assuming a debt equity ratio of 1:1 and
cost of debt @ 8.5% pa. for similar projects, the weighted average Cost of
Capital is calculated as 9.5%.
Accepting above assumptions, the NPV of Rs. 7450.00 million is realizable on March
2007 with main decision of keeping discount rate at 9.5%. If the discount rate is
raised to 20% the NPV reduces to Rs.3849 million. These both are inadequate to pay
back NTBCL having reported much higher residual project cost as on 31-3-2007. The
total amount to be recovered up to March 31, 2007, aggregates to Rs. 11091.17
million (Annual reports of NTBCL 2006-07). For above proposed re-auctioning let
the cash flow calculations begin from 1-4-07 and end on 31-3-2030, i.e. end of term
for NTBCL. The Table:V-22:B is for assessing cashflow up to original term of
concession added with first extension of two years i.e. up to FY 2030.
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Table: V-22:B
Extension of Halcrow calculation for Cash flow & NPV for full term up to 2030
Year Toll Total Income Operating Total Net Cash
ending Revenue O&M Tax/MAT Surplus Capital and Flow
31st Cost Periodic
March Expenditure
2021 2621.00 324.00 719.00 1577.00 0 1577.00
2022 2778.26 349.92 762.14 1666.2 0 1666.20
2023 2944.96 377.9136 807.868 1759.17 0 1759.17

2024 3121.65 408.14669 856.341 1857.17 125.16 1732.00
2025 3308.95 440.79842 907.721 1960.43 0 1960.43
2026 3507.49 476.0623 962.184 2069.24 0 2069.24
2027 3717.94 514.14728 1019.92 2183.88 0 2183.88
2028 3941.01 555.27906 1081.11 2304.63 0 2304.63
2029 4177.48 599.70139 1145.98 2431.8 170.29 2261.51
2030 4428.12 647.6775 1214.74 2565.71 0 2565.71
Note: NPV at 9.5% discount rate for cash flow from FY 2008 up to FY 2030 is
found from above Tables :V-22:A&B = Rs.10720 mfllion.
(Source : Derived based upon given assumptions)
The above derivation for year beyond 2021 under Table:V-22B is prepared from
calculations made by Halcrow under Table:V-22:A up to 2021. Since Halcrow did not
foresee any significant growth of traffic beyond 2021, revenues are projected with
escalation of 6% and all other expenses projected @8% as per earlier assumption. For
taxes, the tax is increased from 2021 at 6% (i.e. at the rate of increase of toll revenue)
which is some what conservative assumption made herewith. Further, the Table:V-
22 :B is extended with safer assumption of keeping Toll income rounded up and kept
constant from 2030 (and hence the tax) and Table V-22: C is prepared. The Table:V-
22:C is for cash flow considering thirty years from FY 2008 so that a new concession
could start from FY 2008 for next 30 years. The other assumptions are maintained as
per Table:V-22:B. Here, it is now new term of 30 years from year 2008 up to 2037
and it yields Rs. 12150 million NPV.
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Table: V-22: C
Extension of Projected Cashflow Up To 2037
Year Toll Total Income Operating Total Net Cash
ending Revenue O&M Tax/MAT Surplus Capital and Flow
31s* Cost Periodic
March Expenditure
2029 4177.48 599.70139 1145.98 2431.8 170.285579 2261.51

2030 4428.12 647.6775 1214.74 2565.71 0 2565.71
2031 4450.00 699.4917 1225.00 2525.51 0 2525.508
2032 4450.00 755.45104 1225.00 2469.55 0 2469.55
2033 4450.00 815.88712 1225.00 2409.11 0 2409.11
2034 4450.00 881.15809 1225.00 2343.84 231.671651 2112.17
2035 4450.00 951.65073 1225.00 2273.35 0 2273.35
2036 4450.00 1027.7828 1225.00 2197.22 0 2197.21721
2037 4450.00 1110.0054 1225.00 2114.99 0 2114.99458
Note: NPV at 9.5% discount rate for cash flow from 2008 up to 2037 is found from
above table = Rs. 12,149.62 million.
(Source : Derived based upon given assumptions)
Summing up from Table:V~22:A,B &C, if it is assumed that the DND Flyway is

offered for sell for remaining term of the concession, it shall at least fetch Rs.
Rs.10720 million on March 2007 (Table:V-22:C). The proceeds of the deed could be
useful to payback almost of the total project cost at the end of March 2007. In fact, the
total amount to be recovered up to March 31, 2007, aggregating to Rs. 11091.17
million can get reduced further if residual project cost and returns attributing to
Government equity of Rs.100 million is forgone by Public Authority. Thus it is very
much possible to terminate the concession to get rid of non conventional provision of
assured return @ 20% by sale proceeds receivable from takers of new concession.
This will benefit to Government and ultimately the users.
However it is logical to check up validity of Halcrow assumption for traffic because

viability of above work out hinges upon future traffic predicted by Halcrow.
Fortunately, the actual traffic has been realized during 2006-07 almost as envisaged
by Halcrow.
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Table: V-23
Achievements in Daily Traffic during 2006-07 Compared To As Envisaged By Halcrow
Class 2-Wheelers Cars Trucks / Buses Total
Projected 19662 49192 1518 70,372
Actual 18446 48,876 1302 68652
Achievement 94% 99% 86% 98%
Note: The maximum capacity of the ’ Delhi- NOIDA Toll Bridge is approximately
222,000 vehicles per day.
(Source: Annual report ofNTBCL 2006-07)
5.S.4.4 Objective of Instating New Concession:
The above exercise has confirmed pay back to NTBCL from calculations based on
escalation of future tolls indexed to CPI from FY 2006. The bidding for sell off
(which will be basically long term lease wherein term of lease will be as per actual
calculations since the effective life of the structures of the project is given 70 years
from Year 2000) should be targeted to reduce the toll level at present or for future
years. If necessary, at a policy level, tax holiday can be extended for such toll
reducing re-bid exercise in BOT/BOOT projects in India. The sale off can generate
immense response because with ‘DND Flyway to Mayur Vihar’ opening up, the
actual traffic is almost as envisaged by Halcrow in its validation study (NTBCL
Traffic Study 2006).
An illustrative exercise of reducing tolls for various cases-at 10% for all years; from
5th year; 10th year and 15th year of operation when new tolling starts from 1-4-07 are
given below. *
Table: V-24
Effect of reducing tolls on estimated NPV for sell out
Options Toll reduction Assumed from NPV as on 31-3-07 % Reduction in
R$. in million for NPV estimated
cash flow 2008- earlier i.e. Rs.
2030 10720 Mn
Option-1 Reduce toll for all users by 10% 9,410.11 12%
from first year starting from 1-4-07
from fifth year starting from 1-4-11
from tenth year starting from 1-4-16
from fifteenth year starting from 1-
4-21
Note; Year wise estimated toll revenue is reduced by 10%to drive NPV from Table:V-22.
(Source: derivedfrom Halcrow data as in above tables)
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Thus the toll rebates under various options still gives huge estimate of NPV with
trivial reduction in NPV especially when rebates are given on later date. For public
acceptance of PPP policy per se, an introductory rebate in toll levels will always
invite appreciation.
The bidding criteria of such re-auctioning will require bidders to bid for highest toll
rebates over present toll levels in addition to upfront paying for relieving NTBCL as
per residual project cost. Considering prosperous cashflow estimates, Rate of Return
regulation may not be needed to attract the bidders of such re-auctioning. Following
MCA (2006) the toll period can be kept fixed as estimated from detailed base case at
Government level. However considering the concept of NPV, with out assuring for
NPV, monitoring of NPV may be required for further negotiations. Since, there is no
construction involved; non engineering firms will also form potential bidders for such
re-auctioning. The case is simpler because the project has gone through all problems
related to construction period & traffic “Ramp Up” period required in initial years.
Now it is only job of financially managing the toll revenue which does not require the
bidder versatile capabilities. The reinviting bids will also resolve problems with
lumpy investments required at construction stage. No wonders if NTBCL or IL&FS
wins the bid with highest offer on toll rebate for continuation of its established
operations. The exercise is worth attempting since any failure in achieving beneficial
bid will only mean continuation of existing concession to NTBCL. Of course, the new
concession shall incorporate review of loss/gains to new concessionaire over his term
for various aspects of project cost and traffic growth as discussed in preceding
subsections. Any further re-auctioning will be embedded in the new concession
agreement either to relieve the loss making concessionaire or to wipe off excessive
profits when the concessionaire attains substantial amount of his estimated NPV or
when scope of facility requires huge new investment to accommodate new needs.
Here it is relevant to recall (Paragraph: 2.4.4 Chapter-II) selling off public assets
namely Chicago skyway and Indiana Toll Roads in US to private parties resulted in to
windfall for local Governments who were owners of these assets and were facing
resource crunch even to perform debt servicing. This is a positive aspect of such
deals. In any case, working out of a detailed financial plan and base case will be
required to proceed once the most importantly, political will is prepared.
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5.6 CASE-3: CONSTRUCTION OF FOUR LANE VADODARA - HALOL
ROAD SH NO.-87 WITH ACCESS CONTROL DIVIDED
CARRIAGE AND SERVICE ROADS KM 8/300 TO 40/00
5.6.1 Project Background and Formulation:
This was the pioneering work at State level in Gujarat State where a State
Government initiated to introduce tolling concept on State Highways by converting a
State Highway passing through rural area in to an access controlled superior highway.
Similar to earlier case of Delhi-NOIDA Toll Bridge this is also IL&FS endeavor to
induce Private Sector Participation in road development. In absence of Tolling
legislation on State Highways, the Gujarat Amendment to Bombay Motor Vehicles
Tax Act (1958) in 1994 enabled to levy tolls on motor vehicles utilizing State
Highways in Gujarat that have been either constructed, reconstructed, upgraded or
repaired by private enterprises which have been specifically authorized by the State
Government to do so. This was followed by GOG entering into a Memorandum of
Agreement (MOA) with IL&FS on 31st October 1995 for implementation of
development, upgradations, repair, operation and maintenance of road projects on a
commercial basis through private participation utilizing private financial resources.
The GOG identified and formulated Vadodara-Halol Road project for implementation
under the terms of MOA with IL&FS.
The selection of project was convincing because the GOG was incurring heavy
expenditure every year to maintain the existing two lane State Highway between
Vadodara- Halol. The underlying crust was rigid concrete cracked pavement which
required heavy expenditure to remove the old crust and any renewal was not
sustaining in such case. The traffic intensity was good enough (approx. 16000 PCU
per day in 1996) but the route was not popular for interstate traffic due to persistent
impaired condition of road. In feet the route between Vadodara-Halol (SH - 87) and
its continuity on Halol - Godhra - Shamlaji (SH-5 which is part of Eastern State
Highway between Vapi to Shamlaji running parallel to NH No.-8 ) is providing
shorter alignment between Vadodara to Shamlaji (and hence Vadodara- Delhi) as
compared to Vadodara- Shamlaji connected through NH-8 for Delhi bound traffic
going through Rajasthan. At that time Vadodara- Ahmedabad Expressway was not
constructed but even after construction of Expressway, the project corridor is part of
shortest link to Shamlaji and Delhi. In any case, traffic between Vadodara & Halol
324
was always important to cater to industries in these two cities and to the traffic
reaching Godhra, Dahod, Zalod, Banswada (Rajasthan) and Indore. The interstate
traffic starting from Vadodara, for Delhi (via Godhra-Shamlaji); for Indore (via
Godhra- Dahod) and for Banswada (via Godhra- Zalod) must pass through Vadodara-
Halol Stretch. The poor riding quality on all the stretches joining Gujarat border and
unsafe tribal zones were deterring the interstate traffic to use Vadodara- Halol route.
Table: V-25
Alternative Routes to Vadodara-Halol- Shamlaji Road
Sr. Route Route length difference & traffic aspects

No.
1 Vadodara-Ahmedabad 25.0 km longer than Vadodara-Halol-
(Expressway)- Shamlaji. But involves interface with urban
Himmatnagar- Shamlaji traffic & Expressway tolls are high.
Road(NH-8)
2 Vadodara - Dakor - Asundra 5.0 km shorter than Vadodara-Halol-
Bayad - Modasa Shamlaji but involves interlace with urban
Shamlaji Road (Except traffic at several places. Still it is known as
Vadodara - Vasad on NH-8 competitive route in view of improved
all State Highways) condition of State Highways. The toll to be
spent is less as only Mahi toll bridge is
faced.
3 Vadodara-Nadiad- 10.0 km longer than Vadodara-Halol-
Kapadvanj-Bayad- Modasa- Shamlaji & involves interface with urban
Shamlaji Road (Except traffic at several places. Still it is known as
Vadodara- Nadiad on NH-8 competitive route in view of improved
all State Highways) condition of State Highways The toll to be
spent is less as only Mahi toll bridge is
faced.
(Source: Derivedfrom State route maps)
The four lanning of Vadodara- Halol stretch was taken up on PPP basis and
subsequently strengthening of remaining route to Shamlaji( for Delhi) was taken up
under World Bank assisted Gujarat State Highways Project (GSHP). Later on, Godhra
to Dahod ( for Indore) and Godhra to Zalod (for Banswada) were declared as National
Highways and thus platform was created to attract interstate traffic on Vadodara-
Halol Road. Actually, Vapi-Shamlaji link is capable of competing with NH-S to serve
traffic for Delhi, Banswada and Indore emanating from Vapi and it avoids NH-8
between Vapi-Vadodara and hence Vadodara- Halol. The whole link is improved
under World Bank assistance but Vapi to Halol link is passing through mainly tribal,
scanty populated region of East Gujarat. Hence commercial traffic shuns such link
325
and prefers NH-8 at least between Vadodara-Vapi except diverted by the authority on
this route. Hence, all the way the route between Vadodara-Halol shall remain
important route for interstate traffic as far as link beyond Vadodara-Halol remains toll
free yet of comparable standards.
5.6.1.1 Structuring Of Vadodara- Halol Toll Road Project:
Like any PPP project, this project was also structured based on feasibility studies. The
detailed feasibility report submitted by Kirloskar Consultants (VHTRL 1996)
discussed three options for this toll project based on segregation of local traffic from
through put.
They were:
Option: I. Strengthening & widening existing 2 lane to 4 lane along with limited
length of service road at selected locations & thus no alternative to toll road
Option: II. Same 4 lane toll road but with alternative toll free service road with lower
service standards abutting carriageway of toll road
Option: III. It is like option-II but differential toll rate on service road (still local
however traffic using limited length of service road are not tolled) abutting
carriageway segregating local trips and slow moving vehicles.
Table: V-26
Cost Comparison for three options (Rs. million per km)
Sr. No. Description Option-I Option-II Option-IH
1 Base construction cost 25.69 36.31 29.60
2 Total landed project cost 38.11 53.73 43.88
(Source: VHTRL Feasibility Report 1996)
The final outcome was modification of Option II&III and service roads were designed
in full length to separate out local vehicles and to be tolled if vehicles were found
traveling from one end toll booth to another end toll booth i.e. service roads can not be
free alternative and are tolled at same rate. Practically due to resistance from road users
for availing free alternative, many vehicles kept using service road free till Vadodara-
Halol Toll Road Company (VHTRL) got strict from April 2003.
326
For implementation, pursuant to Memorandum of Agreement (1995) with IL&FS the
GOG decided to implement this project on Build-Own-Operate-Transfer (BOOT) basis
with the assistance of IL&FS. The IL&FS assisted GOG in incorporating a special
holding Company called Gujarat Toll Road Company Ltd (GTRL) later known as
Gujarat Toll Road Investment Company Ltd (GTRIL). The GTRL was accepted as
concessionaire in unsolicited manner who operated through a special purpose vehicle
namely Vadodara- Halol Toll Road Company (VHTRL) under the management of
GTRL. The GTRL or VHTRL are not listed on capital market for the reason not going
public so far. This fact has some impact on getting information for this case study. The
Gujarat Toll Road Company Ltd (Concessionaire) was in fact a corporate entity having
equity held by GOG, IL&FS and companies set up by Contractors for civil works
namely Punj Lloyd & IRCON International ltd. The brief account of civil works and
major events of this project are as below.
Table: V-27
Civil Cost Related Features and Major events Of the Project
Scope of Work 31.7 Km Long Road Widening &

Strengthening Of Existing 2 Lane To
Four Lane ; Two Service Roads; 3 Major
Bridges; 3 Minor Bridges; 53 Cross
Drainage Works; Two Toll Plaza
Project Engineer(Designs) Lea Associates Ltd., Canada
Independent Engineer(IE) Frischman & Prabhu (India) Pvt. Ltd.
Independent Auditor (IA) A.F. Fergusson & Associates
Civil Contractor Punj Lloyd & IRCON International ltd.
JV
Type of Construction Contract Lump Sum Fixed Cost Contract
Construction Cost Rs. 119.00 crore
Construction Period 18 Months
Defect Liability Period 18 Months
Date of Commencement of civil work l-3-1999(Stipulated & Actual)
Date of Completion of civil work 31-8-2000 (Stipulated)
Substantial Completion Achieved on 15-9-2000 (Revised Date Of Such
Date Completion As Per Revision Of Scope)
Date of Completion as certified by IE 23-10-2000(i.e. toll starts next day)
Payment Schedule Milestone Basis
Mobilization Advance 30% of Construction Cost
Date of signing concession agreement 17-10-1998
Date of signing O&M contract 22-1-1999
327
The civil cost of project was found Rs. 119.00 crores as was estimated but it was
added by Rs. 2.61 crores of additional works hence the civil cost was Rs. 121.61
crores. After adding for social-environmental, land acquisition, preoperative &
preliminary expenses incurred by IL&FS before award of civil work, Interest during
construction, this cost was landed at Rs. 156.05 crores which was added by notional
cost of shareholders’ funds and hence landed project cost was derived at Rs. 170.94
crores. The notional cost of shareholders’ funds was derived as per provision in
Concession Agreement (CA) i.e. 20% on equity / preference share capital & 3% on
term loans provided by shareholders. The 3% was due to difference between
prescribed 20% and actual interest paid as per books of account. The break up of these
Rs. 175.00 crores was envisaged as below and is almost adhered as per actual cost:
Table: V-28
Estimated Landed Project Cost (Rs. In Crores)
Attributes To Project Cost Amount of Attribute % of Attribute
To Project Cost
Construction Cost 119.53 68.30%
Social & Environmental Cost 4.49 2.60%
Preliminary & Preoperative Expenses 7.44 4.20%
Interest During Construction 12.10 6.90%
Fees 7.1775 4.10%
Sinking Fund 3.95 2.30%
Debt Service Reserve 13.55 7.70%
Contingency Provision 6.76 3.90%
Total 175.00 100%
This project cost definition is not only restricted to construction cost as it was in cash
contracts. Unlike cash contracts, interest during construction and many such attributes
build up the cost to be paid from public funds which is tolls in this case.
5.6.2.1 Salient Features of Vadodara- Halol Toll Road:
This is an access control State Highway with superior features like Expressways. The
silent features are:
328
Widening and strengthening of existing 31.7 Km long road from two lanes to
four lanes divided carriageway and continuous service roads on either side.
Grade separation where ever required.
Construction of new bypasses at village Jarod, Asoj and Baska
2 Nos.
Main Toll Plazas one Vadodara side and other Halol side at Km 8+970 and
Km 39+750 respectively and one intermediate toll plaza at Savli - Waghodia
Junction.
✓ 3 major bridges and 3 minor bridges.7 Nos. Underpasses of size of 5 m x 3 m.
✓ Retro-reflective signboards to improve road safety with very good riding
quality to enhance user comfort.
✓ Embankment Repairs and Turfing to stabilize the slopes.
V Round-the-clock Highway Patrolling 24 hours Ambulance services.
S Extensive tree plantation and transplantation of trees.
Provision of roadside arboriculture and landscaping.
V Provision of bus-bays, bus-stops, passenger shelters and truck lay-bys along
the project road.
V Smart Card technology is optionally used for regular users to facilitate ease of
transaction
S.6.2.2 Main Aspects of Concession Agreement:
The concession design for Vadodara-Halol Road is same as NTBCL case, based on
20% assured returns on total investments. The NOIDA and Government of UP are
replaced by Government of Gujarat and NTBCL is here GTRL (For study purpose
GTRL and VHTRL names are used invariably herej.As per BOOT format, rights to
develop land are also incorporated. The concession period is not fixed and it is earlier
of (a) 30 years from date of starting of toll operations & (b) the date on which the
Concessionaire shall recover the total cost of project and the returns thereon @ 20%
from toll revenues, income from development of project length or any agreed means.
The roles of Independent Engineer and Independent Auditor are the same as NTBCL
case. If at the end of 30 years of tolling, the project cost is not recovered with
specified returns as certified by IA, the concession period can be extended by 2 years
at a time till it is accomplished. The GOG can also see that in such case the increased
329
toll rate or revising any terms of CA may help in accomplishing the returns. The GOG
may extend capital pant for the end of concession at that time. However among
minor changes over NTBCL case, here concession period allows 30 years of toll
period itself whereas NTBCL concession apeement considers no separate toll period.
In NTBCL case, concession period is thirty years from effective date (starting date of
construction) or date on which assured returns on investment are attained. Practically,
this difference has no meaning looking to the 20% assured rate of return in both the
cases.
Figure: V-7
Project Span for Vadodara- Halol Toll Road
By definition in CA, Concession period starts from signing CA and
- ends after tolling is over. GOG shall hand over vacant land within
first six months.
After signing CA Construction 18 months of 30 years of toll period or
appointment of shall start construction extended till project cost with
Contractor within three period (max. 20% return is achieved by the
within three months two years to Concessionaire
months achieve
substantial
completion)
(Source: Conceptualizedfrom Concession Agreement of VHTRL)
1. Bidding Criteria: As discussed above, no bidding was done for award of

monopoly under CA. Thus competition for field was avoided by sponsors.
2. Base Case Submission by Bidders: The concession agreement accepts base
case financial model prepared by GTRL. Similar to NTBCL, every year, IE/1A
determine residual project cost to be recovered based on revised cost of project
due to additional expenditure (beyond base case)and deficit in assured returns.
3. Grant Amount to Concessionaire: As discussed in NTBCL case, this is not
applicable when toll period varies to suit to assured returns.
4. Responsibilities of Government: The Government has not been assigned any
contractual obligation/penalties for not timely completing obligations related
to project. The existing and future problems related to utilities and land
acquisitions are left to the Government. Indirectly, any delay from
Government on account of delayed clearances is going to increase project cost.
5. Construction & Maintenance of Facility: The CA is referring to EPC for
civil works like cash contracts. The IE/ IA play major role in determining
330
actual expenditure incurred on the project and its admissibility to project cost
to be recovered as explained for NTBCL case. For maintenance, a separate
O&M Contract with EPC contractors is signed that requires paying Rs. 4.8
crores per annum (Rs. 3.1 crores for toll collection and Rs. 1.7 crores for
repairs, both linked to CPI).
6. Project Cost and Returns: The total project cost shall be the aggregate of-
Civil cost of original work with IDC; Major Maintenance Expenses; Shortfalls
in recovery of Returns in a specific financial year. The Project Cost has to be
determined on the Project Commissioning date by the Independent Auditor
with the assistance of the Independent Engineer. The amounts available for
appropriation by VHTRL for the purpose of recovering the total project cost
and the returns thereon shall be calculated at annual intervals from the
Effective Date in the following manner just like NTBCL case:
Total Revenues to be appropriated =

Gross revenues from Fee collections, income from advertising and
development income or other income as specified
Less: O&M expenses
Less: Taxes.
7. Extension of Concession Period :The Concession Period shall commence on

17th October 1998 (the date of signing CA) and shall extend until the earlier
of: a period of 30 years from the starting date of tolling; the date on which the
Concessionaire shall recover the total cost of the project and the returns at
20% as determined by the independent auditor and the independent engineer
through the demand and collection of fee, the receipt, retention and
appropriation of development income and any other method as determined by
the parties. In the event of VHTRL not recovering the total project cost and
the returns thereon within the specified time the Concession Period shall be
extended for a period of 2 years at a time until the total project cost and the
returns thereon have not been recovered by the Concessionaire. The CA is not
mentioning cash transaction for making good the deficit in assured returns but
it is plausible.
8. User Fee : Like NTBCL case, CA allows restricting the use of the toll road to
motorized vehicles and diverts all tractors, bicycles, cattle driven vehicles,
331
cattle, pedestrians, cycle rickshaw type of vehicles which in the opinion of the
Concessionaire are likely to affect service levels on the toll road to the service
roads. This is significant power to discriminate the users for use of main
carriageway. Similarly it empowers to enforce the collection of toll from
delinquent users or impound the vehicles with out being liable for
consequences. The Concession Agreement had determined the Base Toll Rates
as on base end of FY 1997 and shall be revised to determine the initial Toll to
be applied to the users of the project on the Project Commissioning Date (the
“Toll Rate”)- The following are the Base Toll Rates:
Table: V-29
Base Toll Rates for VHTRL (Rs/Trip)
Vehicle Type One Way Fee in Rs.
Two Wheelers 2
Three wheelers (Auto Rickshaws) 5
Cars/ other three wheelers 20
Light Commercial Vehicle 33.6
Bus - 2 axles 48
Truck - 2 axles 48
For each additional axle beyond 2 axle 12
(Source: CA/or VHTRL)
Like NTBCL case, same CPI based formula for deriving toll level at inception
level( i.e. Initial Toll rates) and for annual revision are applicable. The Toll
Rates are to be revised annually by the Toll Review Committee. The Toll
Review Committee is established which comprised of one representative each
of GOG and the Concessionaire. The remaining third representative is a duly
qualified person appointed by the representatives of GOG and Concessionaire
who shall also be the Chairman of the Committee.
The revision of tolls over the years is given under Table: V-30. The toll levels
are not capped but the increase is also not linked to CPI as found from Table-
V-30. The reasons for irregular toll increase are more focused on viability of
project as elaborated for NTBCL case.
332
Table: V-30
Actual Toll Rates on Vadodara- Halol Toll Road
(Toll Started From 24-10-2000)
Effective ’rucks Bus LCV Car & Rixa 2
Period 2 Axle Every Other Wheeler
Additional LCV
Axle
As 60 15 60 45 25 10 5
Certified by
IA on
inception
From 50 15 50 30 20 10 5 '
24-10-2000
to
31-3-01
From 65 20 65 45 30 10 5
3-4-01 to
31-3-03
From 70 50 70 50 30 10 5
25-4-03 to
31-3-04
From 75 50 75 40 25 10 5
29-11-04 to
31-3-06
From 85. 55 85 45 30 15 10
1-4-06 to
31-3-07
From 90 60 90 50 30 15 10
1-4-07
onwards
(up to 10-6-
08)
% Increase 87.5% 400% 87.5% 48.80% 50% 200% 400%
over BTR
(Source: Derived from GOG notifications & Progress reports submitted by Concessionaire to GOG)
9. Free Service Roads for Local Traffic: Unlike latest ruling of allowing local
traffic at free of cost under MCA (2006), here any traffic using full length of
service road is deemed to be tollable at par.
10. Traffic Risk: Like NTBCL case it is a project based on assure returns, traffic
or any such risks are not identified and allocated to the VHTRL. But no traffic
revalidation studies are conducted to monitor and catch additional traffic for
viability of project. The development rights granted on this project has no
333
commercial value owing to barren rural surrounding on both sides of project
road.
11. Special Rights to Concessionaire: Like NTBCL case the concessionaire has
been given the right to mortgage its interest in the project assets, including the
project site. This is unusual looking to the public nature of such land and
assets . However, the BOOT contract includes ownership aspects and hence
such rights are available with Concessionaire.
12. State Support Agreement and Construction of Additional Tollway: The

Concession agreement requires support from State Authorities in establishing
bilateral monopoly between the Government and the concessionaire. The
agreement abides GOG not to propose, recommend, implement or develop,
establish, finance, construct, own, manage or operate any new road or change
in any way the operation of any existing road or permit any other person to do
so which in the reasonable opinion of the Independent Auditor would
adversely affect the traffic flow or revenue streams of the project road or
affects rights and interests of the Concessionaire. The CA provides scope to
challenge decision of IA in the Arbitration but the monopoly component is not
contended by the GOG. To substantiate the viability concern, CA requires
from GOG not to levy any toll or fee/taxes on the users of the facility or on the
users of any connecting road which is within 50 km to this project or divert
traffic from such roads so as to adversely affecting the viability of project. In
such case of diversion of /closure of feeder roads, the IA shall calculate the
losses to the Concessionaire and that is added to the project cost to be
recovered through tolls. This relief is thus over & above assured returns. The
agreement has identified few upcoming projects (e.g. Vadodara- Ahmedabad
Expressway) nearby this project site and declared them to be excluded from
such clause. Also, the CA does not allow toll exemption to any class of users
and if GOG wishes, it can be done with cost to be reimbursed to the
Concessionaire. In the event of extension of Municipality limits on either side
of project length, the CA ensures from GOG side to exclude this stretch from
being covered under such extension ofjurisdiction.
334
The CA asks GOG to waive unconditionally and irrevocably any immunity to
execute GOG under provision of agreement and to treat this agreement as
commercial act instead of public or Governmental act. This is like taking
Sovereign at par and recognizing this project as commercial project. But the
provisions of CA on other hand is asking Sovereign guarantee to play major
role in extending comforts to the lenders. Further, the land and asset is
transferred to Concessionaire, and then also, the CA is trying to single out
GOG to take responsibility for all unfavourable events.

The CA is not specific for financing of project. No financial indicators are
checked or specified. The CA is not making any reference to subsistence level
revenue or revenue shortfall loans. In fact, IL&FS being financial expert,
inbuilt mechanism to identify and assure subsistence was required to be
provided in terms of some contingencies on atleast smaller scale.
14. Risks, Force Majeure and Termination of Agreement; The Concession

Agreement provides for three different classes of Force Majeure, namely
“Natural Force Majeure Events”, “Direct Political Event” and “Indirect
Political Event”. The CA is not distinguishing occurrence of events during
construction and toll period. The remedies and compensation under each class
of events are similar to NTBCL case only difference is, except “Direct
Political Event” in all events the GOG pays for outstanding debts only and it
pays directly to the lenders. The risk matrix is not defined under agreement but
it can be derived as following that explains all the risks are basically borne by
the GOG. In case of termination due to VHTRL default, the compensation is,
only debts are assumed by the GOG and in case of Government’s default,
project cost with assured returns is payable to the concessionaire just like
NTBCL case.
335
TabIe:V-31
Risk Allocation as per VHTRL Concession Agreement
Commercial or Revenue Risk Government of Gujarat
Sovereign Risk Government of Gujarat
Natural Force Majeure & Indirect Political VHTRL & Insurance (Debts Served By
Events GOG)
Political Risk & Legal Risk Government of Gujarat
Time Overrun and Cost Overrun EPC Contractor
Project Risk Government of Gujarat
Financial Risk VHTRL
O&M Risk O&M Contractor
(Source: Derivedfrom Concession Agreement)
The concession agreement does not spell out the penalty payments or
sanctions on Concessionaire for not adhering to performance
specifications/standards. Such penalties are covered under agreement between
O&M contractor & Concessionaire
15. Lender’s Recourse: Pursuant to the terms of the Concession Agreement, the
GOG has to enter into an agreement (the “Direct Agreement”) with lenders
obtaining, holding and enforcement of the security created under the various
loan agreements entered into by the VHTRL. Due to this direct agreement,
GOG assumes loan repayment to all lenders if project does not generate
sufficient cash’"inflow. The lenders recourse is same as NTBCL case with
provision of Step in rights and novation of agreement. Similarly for IDFC and
IL&FS entered into the agreement for the purposes of a takeout of the Deep
Discount Bonds (DDBs). Thus IL&FS has detailed lender’s recourse but
finally the Government is liable for repayments.
not guiding for customer’s inconvenience. The CA sees that no bottleneck
conditions arise at project site and road surface is maintained at specified limit
336
of roughness. But value for money that is after paying for facility the user
actually is benefited or not is not ascertained.
17. Dispute Resolution Mechanism: The CA discusses role of consultants for

amicable resolution of disputed issues. The usual Arbitration tribunal (Indian
Arbitration and Conciliation Act 1996) is the last recourse as per agreement.
The concession agreement reviewed above is quite methodical similar to NTBCL case
to account the project cost year to year, securing designated returns with full comfort
to lenders. But due to its inbuilt provision of secured rate of return, many planning
and management issues are faced by the company and the planners. The traffic, a
common critical factor for all BOT/BOOT projects has affected the all three
cornerstones (Figure: V-6) of the concession design that stretches concession period
indefinitely in absence of provision for cash transaction upfront or during operations
for deficit/surplus revenues in the project. The VHTRL has also opted for very similar
financial plan to implement the project.
Though exact financial plan/estimates at signing of concession are not available, what
has been implemented to construct and put the facility open to traffic is discussed
hereunder. During signing of Shareholder’s agreement (i.e. on date 21-6-1999), the
estimated project cost was envisaged at Rs. 178.39 crores and initially the debt
structure proposed by the VHTRL was of around Rs 124.90 crores (Debt/Equity
Ratio=2.33). The proposed equity structure amounting Rs. 53.5 crores expected Rs.
11.5 crores of equity support from O&M contractor, Rs. 15.0 crores from IL&FS,
hefty equity fluids of Rs. 22.0 crores from specialist market funds and Rs. 5.0crores
from GOG. On financial close, the equity stake of Government of Gujarat was raised
from 5.0 crores to 15.0 crores by transferring proposed 10.0 crores of debt into equity.
On other side, IL&FS reduced its debt from Rs.44.60 crores to Rs.20.0 crores
however equity was maintained at Rs.15.0 crores as proposed earlier.
337
Table: V-32
Original Debt Structure (Before Financial Close) Proposed
By VHTRL (Project Cost Estimated Rs.178.39 crores)
Debt Source Debt Amount (Rs. in crore)*
Government of Gujarat 10.00
(8%)
World Bank line of Credit to IL&FS 44.60
(36%)
Deep Discount Bonds (DDB’s) 20.00

(Risk participation shared between IL&FS and (16%)
IDFC)
Institutional Bonds 10.90
(9%)
Indian Financial Institutions 39.40

e.g. IDBI, IFCI, (31%)
Total 124.90
(100%)
(Source: GOG and VHTRL Offices )
The financial plan as per financial close is given under Table: V-33. The financing
structure of project is embedded with concept of back ended Deep Discount Bonds
that suits to long gestation period of such projects. The IL&FS has actually worked
like creating a holding Company for gamering equity from pure financial institutions
primarily based on Government guarantees and reasonably applied leverage over
equity funds. On actual implementation, project cost was reduced to 160.0 crores on
completion of civil work (as certified by independent IA/IE) but as discussed above,
IL&FS managed to reduce lesser exposure to the financing of project. Similarly,
financial institutions of India were exposed to debt of Rs.75 crores as compared to
earlier estimates of Rs 39.40 crores. Thus, major chunk of debt was availed from
financial institutions and banks on the basis of most secured lender’s recourse
embedded in the agreement.
338
Table:V-33
Actual Financial Plan (on Financial Close) for Estimated Project Cost of
Rs.175.0 crores
(Rs. In Crores)
Equity Holding GOG Equity 5.0(9%)
Company
Preference 10.0(18%)
Share Capital
IL&FS Equity 15.0(27%)
American Equity 10.0(18%)
Infrastructure Group
(AIG) Indian
Sectoral Funds
Punj Lloyd Spectra Infrastructure Equity 11.5(21%)
(EPC & O&M Manav Investments Equity 3.5(7%)
Contractor)
Total Equity(31%) 55.0 (100%)
Debt IL&FS Subordinate 10.0(8%)
debt
Term loan 10.0(8%)

(W.B. Line of
Credit)
IDBI Term Loan 19.727(16%)
IFCI Term Loan 19.727(16%)
SBI Term Loan 11.852(10%)
CBI Term Loan 7.898(7%)
BOB Term Loan 7.898(7%)
GIIC Term Loan 7.898(7%)
With Take out Guarantee by IL&FS DDB 25.0(21%)
And IDFC
Total Debt(69%) 120.0(100%)
Total Funds(100%) 175.00
Total Project Cost envisaged at financial close Debt/Equity
= Rs.175.00 Crores Ratio = 2.20 :1
or 69:31
(Source :GOG offices)
For Deep Discount Bonds (DDB), the take out guarantee was provided by IL&FS.
Later take out finance for DDB was shared by IDFC for Rs. 20.0 crores & Rs. 10.0
crores by IL&FS and it was decided to issue DDB for Rs. 30.0 crores. These DDBs
were having option of call and put after eight years from issue in 2000-2001. Hence,
if at all take out is needed, it shall come in 2008-2009 and take out money shall be
converted in to a term loan as decided in terms for take out financing. It was thought
339
to reduce term loans by Rs. 5.0 crores from financial institutions by increasing DDB.
This was the period around 1998-99 when bank rates were @18% and lenders were
not interested to finance such projects owing to uncertainty of toll revenues, vague
understanding for lender’s recourse to toll operations and absence of tolling
experience. In such circumstances, IL&FS could manage hefty debts from financial
institutions/banks and was able to attract AIG equity funds. Initially IL&FS suggested
for holding Company structure for Concessionaire Company looking to the secured
returns. The proposal of setting up of a holding Company with specific goal to invest
in the equity /quasi equity investments required by highway projects was approved by
GOG with equity of total Rs. 30 crores at starting. However, this being a single
purpose Company and project generating fixed type of returns only in later stages
return point of view equity investors found it less attractive. Also, typically equity
investors would like to exit through the listing of Company in the capital market and
such exits are not provided in such projects. However, sectoral funds set up for
investments in infrastructure are in search of larger scale of investments which is
suitable for such large toll projects. Under this format, IL&FS received commitment
of Rs 10 crores from the India Sectoral Equity Fund sponsored by American
International Group and could attract debts through private placement of DDBs.
5.6.3.2 Financial Performance:
The financial performance of VHTRL is no different from NTBCL case, mainly

hampered by poor turn out of traffic. Similar to NTBCL, debt servicing overweighed
the project revenues and debt restructuring was executed to bailout the company
within three years of operations.
5.6.3.2.1 Poor Revenue from Tolls:
The actual traffic realization on this old time existing State Highway was not adequate
enough after incurring huge project cost for four lanning the road. The detailed
feasibility report of this project expected high industrial growth of Vadodara- Halol
stretch and spur in interstate traffic over the coming years. The consultant observed
more than 16000 PCU of traffic on this corridor during survey stage while preparing
feasibility report during 1996. The share of goods vehicles was around 45% and in
that 80% of goods movement was originated by this corridor itself. The consultant
340
expected this 16000 PCU to grow by 38% by year 2000, i.e. around slightly more
than 9% per annum due to perhaps better riding quality being offered associated with
doubling two lane to four lane divided carriageway and increase in speed of traffic
flow. The Consultant has estimated traffic on his assumption of 8.8 % of growth rate
for first few years then around 7.7% which did not match right from inception and the
lagging has accumulated to cross 60% of shortfall mark during recent years. In fact
the traffic has withered away from observed base traffic of 16000 PCU in 1996 after
inducing tolling in year 2000. This is shocking keeping in view positive growth of
traffic duringl996 to 2000. Hence this is one more example of overestimated traffic
by the consultant but supported by full fledged assured returns under CA. The survey
results of Consultant & actual traffic turn out are presented in Table: V-34:A.
Table: V-34: A
Survey Results at Feasibility Stage in 1996 for Vadodara- Halol Road
Location Car Bus Goods 2 Auto Bicycle Total Total
(PCU (PCU= Vehicles Wheeler Rixa (PCU (incl. PCU
= 1.0) 3.0) (PCU=3.0 (PCU = (PCU carts) per
for trucks 0.5) =1.5) 0.5) day
& 4.5 for
MAV)
Km 9/200 1883 523 3981 1640 239 619 8911 16035
i.e.
Vadodara
side end
Km 1817 543 4001 1961 792 578 9778 16974

38/800
i.e. Halol
side end
Note: Figures are average daily traffic from seven day survey.
(Source: VHTRL Feasibility Report 1996)
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Table:V-34:B
Short FaB in Traffic on Vadodara- Halo! Road
Year Actual PCU Estimated PCU per % of short fall of

per day day on main c/w estimated PCU per day
of respective year
2000 14189 22144 36%
2001 12949.25 24081 46%
2002 11530.58 26190 . 56% .
2003 12696.08 28485 55%
2004 11774.17 30984 62%
2005 13211.92 33704 61%
2006 19667.75 36289 46%
2007* 22744.78 39075 42%
*Up to Sept 2007
(Source: VHTRL Feasibility Report & Actual operations from Reports in GOG offices)
Monthly variation of traffic and shortfall over estimated traffic are typical for any
BOT/BOOT project and are noticed for this project also. The poor traffic and its erratic
pattern are depicted in Figure: V-8 and V-9.
Figure: V-8
Traffic Shortfall on Vadodara- Halol ToB Road
342
Figure: V-9
Monthly Traffic Variation on Vadodara- Halol Toll Road
(Source: Based on Monthly Progress Reports availedfrom GOG offices)
Reasons of Shortfall: The above shown traffic realization may raise the basic
question of need to provide four lanning on this corridor before actual traffic growth.
A planner may find it advisable to construct two lane road with lower toll level and
then addition of capacity when required. Not only base traffic survey during
feasibility stage but traffic by March 2007 (i.e. after seven years of tolling) has been
around 20000 PCU that is well served with two lane carriage way with paved
shoulders. Such deferment of investment would have given very different financial
scenario. From user & investor perspective, the unnecessary untimely investment has
resulted in to higher financial cost and higher tolls and spiraling revenue shortfall. In
sum, the growth of traffic was seen only after Nov 2005 otherwise it did not reach the
base volume of 16,000 PCU till then. The reasons could be sorted out as 1)
Alternative routes to Godhra via Savli or Via Dahoi - Bodeli might have worked in
avoiding this toll road showing initial resistance to tolling concept; 2) Withdrawal of
backward area subsidies to industries in Halol compelling many units to relocate from
here; 3) A similar political event of levying State Entry Tax on overloaded vehicles
entering Gujarat by GOG during initial years of inception diverted traffic through
Madhya Pradesh; 4 ) leakage of through traffic on Service roads; 5) more valid reason
could be excessive toll rates on this road as compared to other routes and no
343
continuity of good riding quality beyond Halol. Because, Halol - Godhra stretch of
almost same length was under reconstruction during first three yearn where as Godhra
to Shamlaji (real source of interstate traffic for VHTRL) was under reconstruction
after improving Halol - Godhra up to starting of year 2006. That means after paying
handsome toll to VHTRL, the road users were to travel majority of their remaining
leg of journey under substandard conditions. After monsoon 2007, the continuous
length of about 200 km is available in good condition starting from Vadodara to
Halol- Godhra- Shamlaji (i.e. Gujarat border) and only tolled by VHTRL.
For correcting the shortfalls, VHTRL made survey of traffic on service roads and
found that more than 80% of traffic on service road was throughput traffic which
cross the toll booths on both the ends. Hence, it got permission from Government on
April 2003 to toll all through traffic using service road under the guise of local traffic.
However, except some rise on revenue collection mainly due to tolling higher and
covering through traffic on service roads, cash flows were inadequate to serve the
operating & interest costs. It started operations from October 2000 and accumulated
losses were at Rs.400 million as on 31st March 2003. The Company had to work out
debt restructuring to reduce cost of debt from 15.5 % per annum to around 10% per
annum like NTBCL. The VHTRL also went for merger of its operations of with
similar loss making Company created by IL&FS with GOG (AMTRL) for BOOT
project of Ahmedabad- Mehsana road. AMTRL (Ahmedabad Mehsana Toll Road
Company Limited) started operations from Feb 2003. The merging of VHTRL &
AMTRL was effective by 2005.
S.6.3.2.2 Financial Distress in Debt Servicing:
The above traffic volume and hence toll revenues were quite inadequate right from
inception for VHTRL to pay back the interest on debt as evident from illustrative data
presented in Table:V-35.
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Table:V-35
Loan Repayment Default of VHTRL
Sr. Type of lenders Aggregate of defaulted Period of default
No. amounts (Rs.) (Range in days)
2003-2004
1 Loans from Banks Rs 27,697,740.00 1 to 108 days
2 Loans from financial Rs 37,192,093.00 1 to 183 days
institutions
2006-2007
1 Loans from Banks Rs 20,394,537.00 1 to 30 days
2 Loans from financial Rs 922,523.00 2 days
institutions
(Source: Annual Reports of VHTRL 2004 & GTRIL 2007)
The VHTRL also made accumulated losses exceeding paid up capital during FY
2003-2004 and cash losses during FY 2002-2003 & 2003-2004. The debt/equity ratio
started with 1.92 & owing to diminishing adjusted networth, it reached to 10.84 in
2003 and then indefinable during 2004. The operational performance and movement
of long term assets are traced from annual audited reports of VHTRL inTable:V-36:A
& V-36:B. Since the VHTRL has now merged with GTRIL, any financial reports
from 2005 onwards are not revealing actual operations of VHTRL separately.
Table: V-36:A
Operational Performance of VHTRL
(Rs. in crores)
Financial Year Total Interest Depreciation Operating PBT
Ending 31s1 Income paid expenses
March (excl. Int &
Dep)
1 2 3 4 5 6=2-3-4-5
2001* 4.41 7.72 0.11 2.41 -5.83
2002 9.15 18.46 3.65 5.53 -18.49
2003 8.15 20.17 2.58 3.72 -18.32
2004 10.55 21.96 2.58 4.86 -18.85
2005** 33.30 35.78 7.72 8.92 -19.12
2006** 38.77 38.20 7.77 10.64 -17.84
2007** 47.39 33.14 9.10 9.52 -4.37
Note:*It is from 24-10-2000.
** From 31st March 2005, balance sheets of VHTRL & AMTRL are consolidated as
GTRIL adjusting accounts as if merger was effective from 1st October 2003.
(Source: VHTRL & GTRIL Annual Reports)
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Figure: V-10
Operational Performance of VHTRL
Table: V-36: B
Movements in the Long Term Sources of Finance for VHTRL
(Rs. in crores)
Financial Secure Owner’s Accumulated Misc. Exp. Adjusted
Year dloans Equity net of P/LA/C Not Written Net worth
Ending 31st (Paid up carried to off
March shares + balance sheet*
reserves)
(1) (2) (3) (4) (5) (6=3-4-5)
2001 105.86 55.00 5.84 0.0 49.16
2002 107.56 55.00 24.34 0.0 30.66
2003 134.90 55.00 42.56 0.0 12.44
2004 148.02 55.00 61.41 0.0 -6.41
2005** 361.46 264.47 36.60 0.0 264.47
2006** 313.15 320.35 55.72 0.0 320.35

2007** 309.39 315.99 60.08 0.0 315.99
Note:
*The earlier shortfall in revenue was met from Line of Credit of Rs. 150 Mn
approved by IL&FS.
** From 31st March 2005, balance sheet of VHTRL & AMTRL are consolidated as
GTRIL adjusting accounts as if merger was effective from 1st October 2003. The
accumulated losses from FY 2005 are adjusted from toll equalization reserve of
Rs.144.53 crores. The net reserve shall be Rs.144.53 crore- Accumulated Losses as
per col.(4) for every FY. Before merger the reserve was not created.
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Figure: V-ll
Rs. In Crores
Owner s Equity (Paid Total funds owner s Accumulated net of Adjusted Net worth
up shares +reservesl)equity+secured loans) P/L A/C carried to
reserve & surplus
H 2001 0 2002 S 2003 B2004 H 2005 0 2006 0 2007
Table: V-36: C
Leverage Ratio for VHTRL
2001 1.92 2.15 34.19
2002 1.96 3.51 33.83
2003 2.45 10.84 28.96
2004 2.69 -23.09 27.09
2005* 1.37 1.37 42.25
2006* 0.98 0.98 50.57
2007* 0.98 0.98 50.53
* From 31st March 2005, balance sheet o : VHTRL & AMTRL are consolidated as
GTRIL
(Source: Derivedfrom Table:V-36:B)
The Table:V-36-C depicts selection of improper debt and equity proportions by

IL&FS leading to reduction of debts for survival through equity (reserves) infusion
mainly from GOG. It also explains failure of project in inviting private funds at
reasonable terms. The owner’s funds were required to be increased from modest 34%
to 50%.
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S.6.3.2.3 Financial Restructuring of VHTRL:
Like NTBCL, the financial engineers of VHTRL (essentially it is IL&FS) decided for
restructuring of debts and it was associated with merger plan. In response to
Company’s application for restructuring/merger plan to Corporate Debt Restructuring
(CDR) cell housed at IDBI, the CDR Empowered Group approved the package of
restructuring and merger in May 2004. The approved plan was different from NTBCL
case. Here, three IL&FS projects were proposed for merger one of them was based on
Annuity based on NH. The idea was to extend the term loans with reduced rate of
interests and reduce O&M costs etc.
The essential features of this approved package were:
V The entire undertaking of VHTRL & AMTRL including all assets (with rights
of assured returns through tolls) & liabilities were deemed to be transferred to
GTRIL with effect from 1st October 2003. Hence profit/loss of VHTRL &
AMTRL from 1st October 2003 was treated as income/expenditure of GTRIL.
V All assets & liabilities of VHTRL & AMTRL were to be recorded at their
respective book values. Any excess/deficit between the share capital issued to
the shareholders of VHTRL & AMTRL and the book value of net assets taken
over shall be credited/debited as the case may be to the General Reserve. This
was calculated as Rs. -38.05 crores for VHTRL & Rs. -20.78 crores for
AMTRL & thus total of Rs. 58.83 crores were debited from General Reserve
of GTRIL.
V VHTRL & AMTRL stood dissolved with out winding up with effect from 1st
October 2003 .NKEL was to be merged with GTRIL in near term.
V Most importantly, the entitlement of VHTRL & AMTRL up to 30th
September 2003 to recover the shortfall in the assured return as per the terms
of CA were accounted to be recognized with the corresponding credit to the
General Reserve Account. The value of shortfall in the assured return which
were calculated at Rs. 1,359,133,000 for VHTRL & Rs. 674,363,000 for
AMTRL leading to credit of aggregating to Rs. 2,033,496,000 into the
General Reserve Account of GTRIL. This was available amounting Rs. 144.53
crores (after deducting Rs. 58.83 crores for excess value of shares) to absorb
losses fromFY 2005:
348
S Interest rate on borrowing was reduced from the contracted average rate of
15.5% to 10% and penal interest/compound interest/liquidated damages had
been waived by lenders. Repayment terms of loans were rescheduled by
lenders. Promoters were asked to bring in additional capital and provide other
support.
S As per approved restructuring package, the lenders have a right to recompense
over the difference between amount of interest calculated at the contractual
and amount payable as per now agreed rate over the repayment period of the
respective debts in the event the project cash flows are in excess of the revised
debt servicing requirement. Hence it is like readjusting the repayment
schedule of debts to suit to initial problems of deficient revenue.
The proposal was also having plans to merge a third IL&FS venture of annuity based
toll project namely North Karnataka Expressway Ltd (NKEL) on Belgaum-
Maharashtra border on NH-4. This was a NHAI project for four lanning &
strengthening NH-4 from km 515 to 592 with assured fixed annuity payable to NKEL
amounting Rs. 1010.34 million per annum for 15 years. The annuity period was to
start from 20th December 2004 to 19th December 2019 if construction was completed
as per schedule i.e. by 19th December 2004. The projected cashflow of NKEL were
surely to be profit making from inception and were estimated to payback own project
debt by end of FY 2017. But even by end of FY 2008, the NKEL is not merged with
GTRIL. Hence, the survival power has not come from this attribute as it was expected
in the restructuring plan.
GOG Paid Most: Even after merger of AMTRL & VHTRL, the default in loan
repayment has continued (Table: V-35). Merger has also required GOG & IL&FS to
pump in more capital. Specifically, GOG has paid shortfall in returns to VHTRL (&
AMTRL) before stipulated end of concession period which is Rs. 135.91 crores for
VHTRL alone within operations of 36 months. This contribution is in addition to
residual project cost as on 30th September 2003. In absence of data, this residual
project cost is estimated3 to be Rs. 186.00 crores on 30th September 2003 on
proportionate basis.
In fact the AMTRL & VHTRL were created by GTRIL for separate project recourse
and AMTRL started toll collections from 20th February 2003 with similar poor
349
revenue collection. The merging of AMTRL & VHTRL with GTRIL was tantamount
to merging AMTRL with VHTRL. The AMTRL made accumulated losses of
Rs. 19.32 crores by March 2004 i.e. within only 13 months of operations. AMTRL had
owner’s equity of Rs. 76.33 crores and Rs. 195.37 crores of debt as on 31st March
2004. Thus merging with AMTRL was not going to add any survival power to
VHTRL. Hence a major survival was only from GOG who paid Rs.2,033,496,000.00
as a Toll Equalization Reserve during FY 2005 which was total dues payable to
VHTRL & AMTRL by end of September -2003 under the concession agreement
provision for assured return of 20% on project cost as certified by IA/IE.
Thus Sovereign has already paid Rs. 179.35 crores to VHTRL that includes -GOG
equity of Rs. 15 crores; Rs.28.44 crores toll collected from road users up to 30th
September 2003 and; compensating amount of Rs. 135.91 crores. This is more than
the landed project cost on starting date of toll operations. Still, the GTRIL remains
entitled to recover project cost as on 30th September 2003 amounting Rs. 186.0 crores
as derived above with some assumptions. The issue of merger and survival of a
concession at assured returns at 20% without restructuring the CA itself needed some
negotiation by GOG before giving nod to the merger process. It was an opportunity to
terminate the agreement by paying back project cost to VHTRL after selling out the
Toll Road to some private concessionaire as is worked out for NTBCL. Alternatively,
GOG could have considered providing itself some annuity based payment to sustain
the VHTRL (on the lines of proposed similar aid from NKEL project) for some years.
S.6.3.3 Analysis of Issues Due To Lacunae in Concession Agreement:
All the arguments discussed for NTBCL case are applicable as discussed under
subsection 5.5.3.3 of this chapter. Most noteworthy aspect is competition for the
field is avoided by IL&FS in handing over monopolistic concession to GTRL. Thus
here also the conditions for Demsetz Auction (or also alternatively referred as
Demsetz Auctioning) are avoided by IL&FS which were required to be fulfilled for
Public interest. Hence, following points are raised from study of concession
agreement and available relevant details for its practical implication in construction
and operation. Since concession agreement for this case is same as NTBCL, the
arguments made in case of NTBCL are also become relevant here. The lacunae
pointed out in this CA are leading to suggest appropriate corrections for future works.
350
1) Unlike NTBCL case, a variation in definition of concession period found in
this case where thirty years of tolling is counted from operational date Thence*/*
construction period is not under pressure being separated out from toll period.
In VHTRL case, construction started as late as on date 1-3-1999 though
concession was started from date 17-10-98. It is worth appreciating that main
civil work was completed almost within stipulated time. But in terms of
concession design, construction period shall be part of total concession period.
However, efficient construction schedule has not given appreciation to the
EPC contractor due to assured returns to the concessionaire. The EPC
contractor faces liquidated damages but that does not help in incentivizing
concessionaire to construct the work earliest.
2) The civil work is assigned to EPC contractor on competitive basis but the
execution of civil work is not assigned to GOG (the Government State PWD)
though it is a major share holder. The supervisory role of State PWD is also
handed over to expert design & Supervision consultants after the State PWD
has removed all hindrances in the project site and land is totally acquired.
3) Due to structure of concession agreement, any cost overrun is explainable to

IE and can be made part of total project cost (“Gold platting”). There is no
liability on design consultant, supervision consultant and EPC contractor to
stick to estimated costs which as derived after paying huge sum to the
consulatants.CA is not framed to review budgeted civil cost vis-a-vis actual
expenditure like cash contracts.
4) The CA provides for appointment of Independent Engineer (IE) for

determining & ensuring compliance of technical requirements, performance
standards and cost of works and any variations. The appointment of IE is
done by mutual agreement among Concessionaire and GOG. However, CA
directs GOG to issue completion certificate tor completion of civil work
though it is prepared by IE. It thus imposes liability on GOG for compliance
of all codal requirements though GOG does not have any kind of control on
the civil works.
5) All the payments to IE are part of project costs. As per CA, concessionaire can
appoint his own consultant to cope with requirements of IE at the cost of the
project. The GOG is not given such scope as per its role in the project.
6) The toll rates are stipulated in CA as on end of financial year1997 and are
called Base Toll Rates. The Table: V-37 shows comparison of these base rates
with four lane NH as stipulated by MOSRT&H in the same period. The NH
rates are also ceiling rates stated on per km basis and annually indexed to
Whole Sale Price Index. The NH rates are not linked various category of
vehicles. Otherwise, NH rates are on lower side than the rates framed on
Vadodara- Halol state highway.
Table: V-37
Base Toll Rates for Project Road and NH Four lane
Type of Vehicles Max. Toll (Rs.) Per One Toll Ceiling By
Way Trip(BTR) for MOSRT&H As On
VHTRL June 1997
2- Axle Trucks 48.0 31.7 KM xl.4= 44.38
For Each Additional Axle 12 No Extra Toll Per
Beyond 2-Axle Additional Axle
2- Axle Bus 48.0 31.7 KMxl.4= 44.38
Light Commercial Vehicles 33.6 31.7 KM xO. 7= 22.19
Cars & Other LCV 20 31.7 KM x0.4= 12.68
Auto Rixa 5 0.0
Two Wheelers 2 0.0
(Source: Derivedfrom CA and MOSRT&H circular)
7) In case of disagreement with toll revision formula or revised toll rates, both
parties shall refer the case to Toll Review Committee (TRC). TRC is
constituted of three members and each party appoints qualified person and
these two collectively select third one who will be chairman also.
Interestingly, TRC shall keep in view following factors while toll rate revision
disputes: a) the benefits to the users; b) reduced traffic flow over the facility;
c) any increase in cost to Concessionaire due to increased cost of maintenance,
debt servicing due to increased rate of interest, any Force Majeure event like
revised laws or rate of inflation in India exceeds 50% in any quarter; d)
Concessionaire’s debt service obligations and; e) willingness to pay of users.
For calculations, the CA provides formulae to revise toll rates based on
Consumer Price Index. The above toll increments are in excess of 100% in
many cases which are basically based on joint decision of GOG &
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Concessionaire to cope up with low revenue than estimated & are irrespective
of price indices. The toll for every additional axle added to 2-axle truck seems
attracting exorbitant tolls which is unusual. Because the additional axles are in
fact beneficial as per Government policy to reduce axle load and in turn
overloading for durability of roads. On other hand, cars and LCV are spared
from higher rate of tolling. In fact cars &LCV have seen reversal of toll rates
in end of2004.
8) The toll rates could be compared with nearby Vadodara- Anand-Nadiad-

Ahmedabad expressway (NE-1). The toll rates on NE-1 at present Jan2008 are
as below. As per this comparison, the Toll level at Vadodara- Halol is
marginally higher than totally access controlled Expressway NE-1 (which is
more comfortable for four and above wheelers because of exclusion of slow
vehicles like Rixa and Two wheelers). But the NE-1 is punishing Multi Axle
Vehicles (MAV) as compared to Vadodara- Halol which is not felt equitable
looking to the less road damaging structure of MAV.
Table:V-38
Comparison of Vadodara - Halol toll rates with NE-1
Vehicle Vadodara-Halol Toll National Expressway-1
category* Road Vadodara- Vadodara-
Anand Ahemdabad
Car/Jeep 30 25 67
(0.95 Rs. per km) (0.72 Rs. per km)
LCV 50 44 117
(1.58 Rs. per km) ( 1.26 Rs. per km)
Bus/Truck 90 87 235
(2.84 Rs. per km) (2.53 Rs per km)
Multi Axle 150** 187 503
Vehicles Rs. per km) (5.41 Rs per km)
Note: * Rixa and 2 wheelers are not allowed on expressway

**Rs. 150.0 is for 3 axle and add Rs. 60.0 per No. of additional axle.
(Source: Comparedfrom both toll plaza notifications)
9) Referring toll rates with different perspective, toll rates are not matching with
PCU based proportions. The vehicle wise traffic is not available for analysis
for this project. But standard engineering practice uses Passenger Car Unit
(PCU) as a measure for explaining traffic flow. Traffic flow or volume is
353
measured in terms of number of vehicles per unit time. IRC-64-1990-
Guidelines for capacity of roads in rural areas recommends equivalent
passenger car unit (PCU) for converting heterogeneous traffic into measurable
traffic flow. The PCU is used for estimating future traffic and PCU is in fact
representative of road space requirement or level of service on existing roads.
The toll level if derived (based on total toll for bus/truck+ LCV+ car+
2wheeler + rixa divided by total PCU of 7.5) based on PCU the toll per PCU
was Rs. 15.33 on opening date 24-10-2000 ; it was Rs 22.0 per PCU on 30th
September 2003 and now stands at Rs.26 per PCU. The toll rates are hiked
from Rs. 15.33 to Rs. 26 per PCU that is 70% hike in seven years or 10% per
annum. But actual toll rates are differing from this approximation e.g. present
toll rate for bus is Rs. 90.0 though it has PCU=3.0. Thus the actual toll rates
are not following PCU basis either.
10) As per CA, the revised toll rates shall be effective from every 1st April and any
delay from GOG side for issuing notification or reduction in toll rate is
compensated fully by GOG to the Concessionaire in terms of revenue lost by
Concessionaire due to such event. For example, on inception itself, GOG
reduced the rates proposed by IA and this rebate was borne by GOG in terms
of addition to project cost.
11) A strange clause is establishing the records of toll receipt from road users
available at toll plaza as final & conclusive to derive any compensation due to
any loss of revenue. For example, delay in issuing toll revision notification can
cause revenue loss to concessionaire and it shall be compensated based on
road users data on toll plaza. GOG is instructed to send representative at toll
plaza for satisfying itself. This can be dangerous. The GOG is not having any
representative on permanent basis to verify toll receipts at project site.
12) The CA provides for limits on surface roughness and & specifies for other
civil engineering aspects of road section. It also limits maximum 5 vehicles to
queue up beyond first vehicle at window for avoiding chaos at toll booths. It
also provides facility for break down conditions and accidents. The CA does
not give any stipulation for service standards on traffic flow. In case of
temporary closure of lanes (may be for repairs) beyond 24 continuous hours,
the IE may confirm the real problem for closure and if found suitable he can
354
direct to open such lanes. But there is no provision for maintaining any
congestion level or travel time. However, looking to the pioneering work
under this agreement such aspects can be expected to be taken care of by
commercial dynamics of such projects.
13) Since the project is going to stand for at least year 2030, the requirement of
further widening and junction improvements etc. will need due attention in
coming years and CA is not providing for this. As per feasibility report at the
end of project in 2030, the main four lane toll length is estimated to cany 1.25
lacs of PCU & 15, 000 PCU by service roads which hints requirement of some
development to maintain service standards and acceptance of toll levels in
those days. If all of a sudden, traffic rises to abnormal level and design
capacity is reached before end of concession, CA is not providing any
recourse and lacks vision for such events. MCA (2006) has addressed this
issue and has stipulated to end concession with out compensation when
facility reaches design capacity.
5.6.4 Policy Implications from Case Study:
Since this concession agreement is also based on Rate of Return regulation, the comer
stones identified for NTBCL case i.e. Project Cost; Traffic Volume and Tolling
Terms (Toll period and Toll levels) are equally relevant for this case as well. All
policy implications discussed under subsection 5.5.4 are equally valid like NTBCL
case and hence are not repeated here. However, certain aspects are worth discussing.
The concession for VHTRL is designed by IL&FS and it works as given in a
conceptual model in Figure V-12. The suggested correction is for incorporating
periodic review of concession operations to safeguard investor’s interests for earning
Public interests. The scope for such review is discussed hereunder.
5.6.4.1 Remedy To VHTRL Concession Agreement:
Keeping in view then circumstances of PPP environment, concession agreement for

VHTRL can be understood as a stepping stone for further development of PPP with
amendments in balancing manner. The concession granted to VHTRL was based on
Rate of Return regulation and hence if project cost at designated return is paid back,
the concessionaire can be relived and amended concession agreement can be
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introduced. The decision of adopting Rate of Return regulation is evident. In a
pioneering endeavor, returns were required to be assured. But IL&FS has not attracted
equity holders or designed debt instrument tallying with estimated cashflow. The
IL&FS could only manage term loans that did not match with project cash flow and
loans were availed on the basis of direct loan agreements with GOG and not based on
potential of project. The actual operations revealed that IL&FS was wrong in
selecting the project for four lanning. IL&FS was supposed to work out and assert
supporting developments like strengthening of further links to attract interstate traffic
instead of State support agreements for avoiding competing routes. Due to untimely
or wrong selection of project, IL&FS created an entity that required high toll levels to
sustain. After debt restructuring, the project is earning satisfactorily through toll
operations alone but still lagging to catch level of assured 20%. Thus neither road
users, nor Government is comfortable during tenure of this CA atleast going to last up
to year 2030. The CA for VHTRL has severe flaws and any delay in curbing ever-
increasing residual project cost could mean perpetually vesting the assets and chunk
of land to private concern that has no user’s recourse. Arguments offered by Pargal
(2007), a consultant associated with the World Bank are straightway admissible for
VHTRL also questioning nature of privatization & non conventional assured returns.
The pavement condition of project road has already shown distress and huge
reconstruction costs are anticipated probably before FY2030. If the concessionaire
succeeds to cross original milestone of FY2030, all the expenses to reconstruct the
pavement and rehabilitation of structure would add heavy sum in residual project cost.
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Figure: V-12
Project Structuring Of VHTRL under Rate of Return Regulation
', interest
(Source Conceptualizedfrom above case details)
As a prudent practice, it is suggested to end such agreement by paying back dues as

per agreement. This is feasible through re-auctioning of concession looking to the
recent favourable operational results of VHTRL. A simple exercise to work out
strength of projected future cashflow similar to NTBCL case is made hereunder for
verifying possibility of paying back GTRIL for termination of concession agreement.
5.6.42 NPV of Future Cash Flow & Future Financial Management:
Like NTBCL case, a simple exercise is worked out with simpler assumption for toll
rate growth, O&M costs and income tax in absence of any estimates available for
future cash flow. Following conservative assumptions are made to understand
potential of the toll income for future years and NPV at various discount rates. :
1. The known contract value of Rs. 27.0 crores of toll collection through
franchise for 2007-08 is adopted as a base value. The toll revenue is increased
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every year by 6%( for inflation) applying assumption of Halcrow for NTBCL
though the CPI indices suggest more than 7.55% growth during 1991-2005.
This is in feet very much underestimation of toll revenue for VHTRL case.
Because, Halcrow had taken into account some traffic growth rate over &
above yearly toll rate revision due to inflation. In this case, no growth of
traffic is expected beyond 2007 and that is very safe big underestimation
considering growing importance of Vadodara- Halol- Godhra- Shamlaji link
as a alternative to NH-8 to enter Rajasthan en route Delhi. In fact GOI has
approved the link between Halol to Shamlaji for four lanning under Viability
Gap Funding (VGF) scheme assuring central assistance on this State Highway
and this four lanning will be having tremendous impact on VHTRL.
2. The O&M for VHTRL has remained so far as high as around 50% of toll
income and later turning up around 20%. Here, O&M is assumed at 10% for
managing operations and 2% for routine minor repairs. In addition to this, a
major renewal program is estimated at every sixth year as per personal
experience in this field.
3. The Depreciation was estimated by SLM method by VHTRL during FY 2003
and 2004. The same value of Rs. 2.58 is applied for tax purpose for remaining
years.
4. The VHTRL has accumulated losses so far and like Halcrow, it could have
been assumed that no taxes applicable up to 2010 and then next ten years
being tax holiday but MAT applied at 7.65% and onwards tax at 30% (with
surcharges 33.66%). Here, on safer side, the tax is assumed 11% (MAT) up to
2016 for tax holiday between 2007-2016. Then I.T. is taken at 33.66% for
remaining years.
5. The net cashflow, after deducting outflow is discounted at 9.5% considering
Halcrow estimates of cost of capital. Since Planning Commission often
considers this rate at 12%, it is also applied as an alternative. Additionally, a
rate of 20% is also applied to check up the NPV. Sine the original CA is in
vogue up to 2030 atleast, the cash flow is derived for this period. The exercise
is extended up to 2035 to see that residual project cost at march 2007 is
touched. In all cases, the cash flow from FY 2008 is considered.
The whole idea behind this exercise is to check potential for paying back VHTRL
(or in a sense to IL&FS) the project cost derived by IA/IE at FY 2007. Earlier through
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quick estimation it was found at Rs. 186.0 crores as on September 2003 and assuming
zero return onwards up to March 2007, it leads to get project cost of Rs. 354.0 crore to
be recovered by 31st March 2007. Any actual difference of project cost suggested by
IA will require further extension of concession period to be proposed for re
auctioning.
Table: V-39: A
Estimation of Future Cashflow for VHTRL
(Rs. in crore)
FY Toll O&M Periodical Depreciation Income Net
revenue Cost# maintenance Tax* operating
inflow
1 2 3 4 5 6 7=(2-3-4-6)
2008 27.00 3.24 0.00 2.58 2.33 21.43
2009 28.62 3.43 0.00 2.58 2.49 22.70
2010 30.34 3.64 0.00 2.58 2.65 24.04
2011 32.16 3.86 0.00 2.58 2.83 25.47
2012 34.09 4.09 5.00 2.58 2.47 22.53
2013 36.13 4.34 0.00 2.58 3.21 28.58
2014 38.30 4.60 0.00 2.58 3.42 • 30.28
2015 40.60 4.87 0.00 2.58 3.65 32.08
2016 • 43.03 5.16 0.00 2.58 3.88 33.99
2017 45.62 5.47 0.00 2.58 4.13 36.01
2018 48.35 5.80 10.00 2.58 3.30 29.25
2019 51.25 6.15 0.00 2.58 4.68 40.43
2020 54.33 6.52 0.00 2.58 4.98 42.83
2021 57.59 6.91 0.00 2.58 5.29 45.39
2022 61.04 7.33 0.00 2.58 5.63 48.09
2023 64.71 7.76 0.00 2.58 5.98 50.96
2024 68.59 8.23 15.00 2.58 4.71 40.65
2025 72.70 8.72 0.00 2.58 6.75 57.23
2026 77.07 9.25 0.00 2.58 7.18 60.64
2027 81.69 9.80 0.00 2,58 7.62 64.26
2028 86.59 10.39 0.00 2.58 8.10 68.10
2029 91.79 11.01 0.00 2.58 8.60 72.17
2030 97.30 11.68 20.00 2.58 6.93 58.69
2031 103.13 12.38 0.00 2.58 9.70 81.06
2032 109.32 13.12 0.00 2.58 10.30 85.90
2033 115.88 13.91 0.00 2.58 10.93 91.04
2034 122.83 14.74 0.00 2.58 11.61 96.49
2035 130.20 15.62 5.00 2.58 11.77 97.81
Note:
# O&M taken as 12% of toll income i.e. 10% for managing operations and 2% for
routine repairs.
• I.T. taken at 11% (MAT) up to 2016 & then 33.66% .
Knowing the fact that toll income for FY 2008 is about 27 crores, every next year toll
income is raised by 6% per annum and above financial statement is worked out.
(Source: Derived based on own assumptionsfor known value oftoll collectionfor FY2007-08)
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The results of NPV for above assumption based cashflow are tabulated as below. The
results are having wide variations as expected. Since the re-auctioning is envisaged to
shun the 20% returns assured to IL&FS through a unsolicited proposal, the NPV
worked out @ 20% may not be a option of planner’s choice. However, it is worth
noting that this option is fetching around Rs. 150.0 crore under above assumptions
provided CA is extended up to 2035. The Table: V-39:B suggests that it will require
extending the concession atleast up to 2035 if no growth of traffic is assumed in case
of discounting at 12% or 9.5%. Like NTBCL, it can be safely stated that it is easier to
terminate the prevailing CA and re- auction the concession on competitive basis for
real privatization. Because any bidder would consider traffic growth of atleast 5% for
future years which is assumed zero here, any sensitivity test will provide encouraging
results than estimated here. Any excess benefit estimated and received by planner
through re-auctioning can be utilized to reduce the toll level or freeze the toll level at
certain point of time. It is possible that IL&FS itself may like to bid for re-auctioning
but shall be allowed under pure competitive market conditions.
Table: V-39:B
Estimation of Future Cashflow for VHTRL (Rs. in crore)
Concession period NPV at 9.5% of NPV at 12% of NPV at 20% of
up to discount rate discount rate discount rate
Up to FY 2030 309.43 . 246.95 139.88
Up to FY 2032 327.49 257.35 141.80
Up to FY 2035 352.12 270.75 143.89
(Based on above assumptions and estimated cash flow)
As an attempt to reduce O&M expenses and for securing higher revenues, GTRIL has
started auctioning yearly tolling rights (with out responsibility of maintenance) from
1st August 2005 and first accepted bid was for Rs. 10.56 crores. The next such award
was for Rs.19.01 crores effective from 21st August 2006. The recent award is for Rs.
27.27 crores and toll is being collected by a private external party. This auctioning of
toll rights has helped in increasing toll revenue and reducing operational cost. Most
importantly it has reduced the risk of traffic variation during the year and public
resistance is borne by the toll collecting agency bearing all the revenue risk during
that year. But all these benefits could only be truly internalized if the complete project
is privatized by re-auctioning.
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The case study of NTBCL and VHTRL are found relevant to go through comments of
Gessar Queiroz (World Bank 2005), Lead Highway Engineer for World Bank, He
pointed out following problems with unsolicited PPP proposals to Government:
• It is origin of most controversial private infrastructure projects.

• In theory it seems generating beneficial ideas (during earlier stages) but in
practice, it turns up as an unfavourable experience.
• It attempts to avoid competition & there are exclusive negotiations (with out
exposed to market forces) behind closed doors. Usually their sole-source
negotiations take much longer route than expected.
• Some governments forbid ail unsolicited proposals to reduce public sector
corruption and opportunistic behaviour by private companies. Some
governments are found recognizing a good project idea in the tender by
compensating the original project proponent.
The comments of Queiroz are self explanatory keeping in view evidences provided by
IL&FS in the two projects studied in this research work. However, it is worth to
appreciate that unsolicited efforts from IL&FS were proper during then scenario in
road sector. The major problem was debt structure not properly designed by IL&FS to
match with project specific cashflow and the problem was aggravated by wrong
traffic projections by consultants leading to gamut of issues faced by users and
Governments. As an academic suggestion, it is proposed to terminate concession
agreement for VHTRL which can be attained from proceeds of re-auctioning as the
future cash flow is promising. A new concession can be designed as discussed in
subsection S.5.4.4. which need not be on “Rate of Return” regulation. The project
road has already come out of “Ramp Up” period and hence new concessions with
competitive bidding subject to periodical re-auctioning can serve to level up the
deficits and surplus profits in such projects. To reiterate, the bidding criteria of
proposed re-auctioning and all further re-auctioning of the same project road shall
require bidders to bid for highest toll rebates over present toll levels in addition to
upfront paying for relieving GTRIL or subsequent concessionaire as per residual
project cost or agreed NPV. Hence, user’s recourse shall be emphasized and as a core
objective.
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5.7 CASE-4: CONSTRUCTION OF ADDITIONAL TWO LANE BRIDGE
ACROSS RIVER NARMADA WITH APPROACHES ON NH
NO.-8 KM 192/0 TO 198/0
This project is one of the typical of BOT agreements presently under operation in
India. Of course, some clauses are amended in preparing Model concession
Agreement (MCA) year 1999 and 2006. The MCA (1999) concession agreement
avails capital grant to the concessionaire whereas MCA (2006) assures some traffic
guarantee and is prepared by Planning Commission. Theoretically this one and MCA
(1999 and 2006) all three versions are based on Price Cap regulation and restricts
concession period and hence are also capping concession period. The projects based
on MCA (1999) are yet in infancy and not seen many years of operation. The MCA
(2006) is very recent and projects based on MCA (2006) are yet to see operations. In
Gujarat all BOT projects at operation stage on NH are approved before MCA (1999).
The study of this project however explores issues with an archetypal BOT project in
contemporary sense. As studied below, the crux of such agreements is asking the
Entrepreneur to invest upfront and collect tolls carrying most of the risks while
Government is acting as an Employer & not as a partner.
5.7.1 Project Background And Formulation:
In pursuance of four lanning of NH No.-8 between Vasad (km 93/0) to Panoli (km
218/2) by Seventh Five Year Plan (1985-90), the four lanning of NH length between
these two points was taken up by MOSRT&H stage wise. The four lanning of km
192/0 to 198/0 and additional Narmada River bridge were part of this Five Year Plan
and it was to be executed by State PWD of GOG for MOSRT&H. The GOG had
estimated cost of four lanning of km 192/0 to km 198/0 (excluding Narmada bridge)
at Rs.9.50 crores on 1989-1990 Schedule of Rates (SOR) basis and submitted to
Ministry. The matter was under compliance with Ministry till 1993-1994. Similarly
GOG had estimated cost of additional Narmada Bridge at Rs.35.42 crores on 1990-
1991 Schedule of Rates (SOR) basis. Unlike approach roads, bridge work was
approved by Ministry & technically sanctioned by GOG during 1994-95 paving way
to invite bids for bridge work. But the bridge work was also kept pending along with
approaches and the project of New Narmada bridge was put under PPP route in end of
1995. The potential for tolling under BOT contract was evident as per evident traffic
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intensity and successful tolling history of existing Sardar Bridge on Narmada River
since more than one decade.
Table:V-40
Per Day Average Traffic Flow Near Narmada Bridge Site On NH N0.-8
Year of Car/Jeep/ Buses Trucks Bus + Truck = Gross
Census 3Wheelers/Van HMV Total
April 1993 2941 1239 9878 11117 25175
October 1993 2236 1179 9605 10784 23804
April 1994 2027 1662 11298 12960 27947
October 1994 2571 1104 9484 10588 23747
April 1995 3600 1310 10020 11330 26260
October 1995 2902 1493 11608 13101 29104
April 1996 3653 1505 11344 12849 29351
October 1996 3573 1350 13465 14815 33203
(Source: Traffic Census Results GOG)
The traffic intensity was thus surely in excess of 35000 PCU corroborating need for
four lanning. Hence, the project formulation was in fact lagging to implement four
lanning and the growth rates of commercial vehicles were higher enough pressing for
four lanning urgently. As per this data, commercial vehicles i.e. Bus and Trucks have
annually grown by average 7% & 5% respectively from April 1993 to April 1996.
Unlike IL&FS sponsored PPP projects, traffic census is the only source of past
records to estimate future traffic. No separate feasibility studies are conducted in
MOSRT&H cases. The bidders for this project have to trust the above census for past
data whereas for traffic data at the time of bidding could be self surveyed for
predicting future traffic during concession. The toll collection on adjoining existing
old bridge was on Rs. 4.89 crore for 1993-94; Rs. 5.18 crore for 1994-95; Rs. 5.87
crore for 1995-96 (as known from GOG offices) i.e. bidders could expect minimum
Rs. 6.0 crore per annum to start the operations around this period. Under this
background, invitation of bids, bidding and award of work was done by MOSRT&H
itself without involving GOG. The brief account of this BOT project is summarized
under Table:V-41.
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Table:V-41
Civil Cost Related Features And Major events Of The Project
Scope of Work 4.63 km Long Road Widening & Strengthening

Of Existing 2 Lane To Four Lane ; 1.364 km
long bridge portion with 13 spans of 96.2 mt &
2 spans of 56.1 mt; one Toll Plaza; important is
maintenance of old bridge
Type of Agreement Build -Operate - Transfer (BOT)
Concessionaire Narmada Infrastructure Construction Enterprise

Limited (NICE), a SPV of L&T group.
Independent Engineer(IE) M/s Shirish Patel & Associates, Mumbai &
State PWD of Gujarat
Independent Auditor (IA) Not Applicable in NH projects.
Civil Contractor Concessionaire ( Agreement does not recognize

any civil work contractor for its management)
Construction Cost Rs. 13 8.00 crore
Date of invitation of Proposal 5th September 1995
Date of GOI letter of Intent for 12 December 1996

NICE
Concession Agreement signed on 21st November 1997
Concession Period Total 15 Years including Construction period

(ends on 21st December 2012)
Construction Commencement 21st December 1997
date
Construction Completion date 21st September 2000
Toll started from date 11m November 2000
(Source: NICE <6 GOG Offices)
Before exploring the case of NICE, it is worth to note a major issue faced by a private
toll collection operator on old bridge (Sardar bridge) just during construction period
of new bridge.
5.7.1.1 Litigation on Auctioning Of Toll Collection Rights On Sardar Bridge:
The GOG had been collecting tolls on Existing Sardar bridge for MOSRT&H on
agency basis since 1981 for recouping cost of said bridge (about Rs. 11.0 crores) and
after recovering foil cost with some interest, GOG continued to collect toll from same
location for other bridges constructed by Ministry funding on NH-8. Just to avoid
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problems with toll collection using GOG staff, a radical policy decision was taken to
auction the tolling rights with out maintenance to private firms from around 1996-97.
One of the firms appointed during 1999-2000 faced hardship probably due to over
quoting the bid and failed to remit some installments. This agency was awarded to
remit the toll collection at 0.962% of estimated yearly revenue of Rs. 8.62 crore
within 104 installments (twice a week) starting from date 8-12-1999. Meanwhile Mr.
Kishore Laxminarayan Gaur filed a Special Civil Application No. 4882 of 2000 in
High Court of Gujarat demanding quashing of toll on Sardar bridge, stating it
arbitrary, illegal and violating the statutes. The Honourable Court first passed Ad-
interim-relief on date 12-5-2000 and accordingly the private agency was divested of
its contractual obligations till final order of the Honourable Court. Since, the tolling
was to be continued, GOG deployed its establishment and filed affidavit for vacating
the stay stating that the whole exercise was done under National Highways Act
1997. But Honourable Court observed that contract was allowing “unjust
enrichment” of a private party who has not invested any money and is eligible to
sweep up excessive gains if traffic exceeds forecasts. The Honourable Court noted
that if the private party was allowed to operate, it enables them to “unjust enrichment”
and if the contract is abandoned, the State is reaching to “unjust enrichment”. The
Honourable Court had no objection to state reaching “unjust enrichment” but the State
was interested to implement the contract. The Honourable Court passed the ruling on
date 29-5-2000 that the private operator may collect the taxes and deposit in a joint
account with GOG but they shall be allowed to withdraw to meet with operational
expenses from this account till further judgment. Practically, the private operator
could not continue the toll collection and the contract was terminated with penalty as
per provisions of agreement. The petitioner withdrew the contention but the matter
raises main issue of public resistance to toll operations especially under high profit or
long tenure tolling. In fact this litigation is evidence of awareness of users (mostly
local traffic) for reasonability of commercial operation of concessions and
resistance to tolling.
5.7.1.2 Litigation on Tolling Of Existing Bridge:
Another relevant Court matter hints at implications of public resentment for tolling of
existing public facility. A new bridge was built on River Mahisagar on NH-8 km 91/5
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on BOT basis and was put on operations in year 2000 at the project cost of Rs. 42.0
crores. But the MOSRT&H decided to toll the adjoining existing bridge also to make
possibly shorter toll period which was awarded for 95 months. Since the existing
bridge was built by Ministry from public funds almost four decades ago and was toll
free, the Ministry’s decision was challenged in Court by a lawyer in November 2000.
The contention was, road users going Ahmedabad from Vadodara were using old
bridge with old approaches and no further improvement was made by Concessionaire
to impose tolling on old bridge. The matter did not stand in Court of law and tolling
continued for full term. But the investors had tough time since the tolling had just
begun 15 days before and the contention was faced by the investor as a respondent.
The expenses for litigation borne by investor were not compensated by Government.
Hence, project involving maintenance and tolling of old bridge has more resistance to
tolling and in such events, Public partner i.e. Government stands as a silent spectator.
However, to make project viable within shorter toll period, old bridge was clubbed
with new bridge under BOT project and concessionaire has to assume this
idiosyncratic risk alone.
5.7.2.1 Salient Features of New Bridge on River Narmada:
The second bridge on Narmada River was built by Narmada Infrastructure

Construction Enterprise Limited (NICE) through Engineering Construction &
Contracts Division (ECC) of Larsen & Turbo Limited (L&T) and thus ECC was EPC
contractor for SPV of L&T i.e. NICE. Also, DAR Consultants UK were design
consultant for NICE. This new bridge was built only 29 mt downstream of existing
Sardar bridge. As per Concession Agreement (CA), a private firm was appointed as
Proof Consultants & Supervision Consultants. Thus Independent Engineer was
available like earlier case of IL&FS but the powers of IE were not recognized above
capacity of MOSRT&H and State PWD. The salient features of bridge are:
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S Construction of 1.364 km long bridge (by category it is a major bridge) in
perennial Narmada River.
S Approach road for a length of 4.63 km.
^ Segmental construction adopted for faster and superior superstructure.
Segments cast at precasting yard, transported and erected using launching
girder.
S Foundation well sinking by jack down technique that saved considerable
construction time.
S Modem toll plaza with control room and back up power facility
S Bridge condition monitored using instrumentation systems.
S River bed protection works with stone crated boulders/Geofabrics.
5.7.2.2 Main Aspects of Concession Agreement:
The Concession for this work is designed similar to Chalthan ROB project and hence
on price cap principle and not assuring any returns. The bidders were asked to bid for
concession period and CA provides to retain all revenues after recovering project cost
up to agreed term of concession. On other side, the revenue shortfall or traffic risk is
fully endorsed to concessionaire. This Concession Agreement (CA) is also found
carrying detailed stipulations like cash contract. The reason could be to match with
existing bridge from constmction point of view. The following similarities/relevance
was found with cash type contracts.
1. The qualification criteria for bidders interested in this work are for past similar
work (not on toll basis) and adequacy of manpower/machineries. Specification
and quantities are predefined. The material selection is also predefined. No
design flexibility, mainly due to availability of adjoining existing structure. No
aspect is linked to toll operation capacity. Thus bid assessment is like cash
contract; how much it will cost to Public? Here, the Entrepreneur is supposed
to show how he arrived at toll period (in months) but the veracity of such cash
flows is not obligatory for Government since the viability is treated as
entrepreneur’s purview. The only financial stipulation is imposing minimum
equity requirement of 51 % for NICE up to constmction period and then it may
be at least 26%. Otherwise, the CA does not include any benchmarks or
standards for financial performance.
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2. The CA allows construction period of maximum three years but any saving in
construction time is like bonus above stipulated toll period of 12 years. The
delay is like curtailment in toll period but such delay may invite termination of
agreement if Government wishes. So, it is differing to cash contracts for time
frame of construction.
3. Any quantity variation or revision in scope is assessed based on State PWD
Schedule of Rates (SOR). Thus time overrun and cost overrun are treated
more like cash contracts.
4. The CA declares Steering Group (STG) as a technical authority on all
technical matters, only after issuance of completion certificate by Supervision
& Proof Consultant and approved by STG the work is deemed completed. The
entrepreneur has to pay for this private consultant up to Rs. 2.5 crore as a fee
and deposit with GOI Rs. 1.5 crore for Government inspection. Thus the scope
for coercion is present to some extent like cash contract.
5. All the laws (e.g. labour laws) are similarly applied like cash contracts. Hence,
the entrepreneur has to satisfy all related departments of sovereign and no
relief is available from Government though it is in a sense partner in such
projects. Any permission required from any department is to be obtained by
entrepreneur himself.
6. The material requirement and its availability are to be ensured by the
entrepreneur. The testing of material is entrepreneur’s responsibility but like
cash contracts, the Government monitors the process and approval of
Consultant is must. Thus, the quality aspect is ensured by Government like
cash contract but risk of material suitability is kept limited to entrepreneur.
7. The design for safety and workability is stated to be onus on entrepreneur but
his designs need nod of Consultant /STG. The stipulations are like- the
entrepreneur shall do every thing under approval of Consultant /STG but if
any thing goes wrong the entrepreneur shall bear full risk. Any approval of
Consultant /STG does not indemnify the entrepreneur from responsibility of
design & execution aspects. So that way the CA is helpful to Government in
transferring construction risk fully to the entrepreneur but still maintaining
hold over the execution. Surprisingly, the structure like major bridge is handed
over to Government within 15 years of construction almost free of cost (at
token amount of Rs. 1000.0) without any indemnity during remaining long
period of (around 30 years) designed life.
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8. Like many short term cash contracts, price escalation within stipulated 36
months of construction period is borne by the entrepreneur.
9. Similar to cash contracts, the performance guarantee of Rs. 3.5 crore(it is in
this case 2.5% of project cost) is to be deposited by entrepreneur but here the
term is covering construction period plus two years.
10. No mobilization advance is provided which was then routine practice for
lower to medium size cash contract. One month period is allowed for
mobilization of plant, man power and machineries which is common for cash
contracts.
11. Like cash contract, the land is handed over for construction purpose and only
innovation in this case is extension of this land holding term up to end of toll
period. The similar feature is no ownership or alternative use of land or
earning of rent (only innovation is allowing toll receipts) is allowed.
12. Since it is major bridge, strict stipulations with minimum design flexibility as
in cash contract is understandable. A meager amount of Rs. 1.0 crore is
required to be maintained by NICE with Government for maintenance
guarantee and is held valid till two years after end of concession period.
Considering toll period of 12 years, it is very less if actually to be used by
Government. But the provision is like recent trend of maintaining guarantee
money for 3 to 5 years in cash contracts.
Thus, the CA is not significantly differing from earlier time CA as found in case of
Chalthan ROB as far as construction aspects are concerned. However, the CA for
Chalthan ROB was quite detailed mentioning percentage wise progress of work and
there was concept of “Project Cost” with 18% interest during construction and toll
period. Here, the CA neither acknowledges project cost nor defines it. The
Government had a clear picture of existing Sardar bridge to be matched and
competitive bidding had finalized the concession period. So, the cost portion is not
emphasized by the CA. However, the clarity of project cost is found useful when
losses are to be compensated under Force Majeure events or termination. Also, the
CA in this case is more Committed to sustain toll period as agreed except under Force
Majeure events persisting more than 120 days. In Chalthan ROB, the Government
held unilateral capacity to end the agreement at any time. The operational aspects in
this case are more elaborative than Chalthan ROB case mainly due to longer tenure of
CA.
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For comparative purpose the study of concession agreement (CA) has been divided in
to following sections.
1. Bidding Criteria: As discussed above, the shortest concession period (here it

includes three years of construction period) is accepted as a concession period.
The bidding requires submitting estimates of civil costs as supporting
information.
2. Base Case Submission by Bidders: The bidders shall bid in a open
competitive bidding with base case financial model indicating how he will
recover his investment. The agreement expects to get constructed an additional
2-lane facility at the expense of entrepreneur and in return it allows him to
recover the cost of construction & maintenance, cost of traffic management
and fee collection from charging vehicles using the vehicles at prescribed
rates. It is noteworthy that Government is not assuring any returns despite
accepting cash flow of the Concessionaire worked out with specified returns.
Because Government is merely satisfying itself to establish that the
Concessionaire is proving the financial viability of his offer through his
financial model albeit not getting liable to Concessionaire’s assumptions.
3. Grant Amount to Concessionaire: This is a concession agreement based on
Price Cap regulation without any capital support or revenue sharing
mechanism.
4. Responsibilities of Government: The Government has not been assigned
any contractual obligation/penalties for not timely completing obligations
related to project. This is because; land was available for construction without
any hurdles.
5. Construction & Maintenance Of Facility: The CA is elaborative for civil
works like cash contracts as discussed in earlier subsection. The control on
construction is maintained by Government and independent engineer. Unlike
IL&FS cases, independent engineer is not available for full term of agreement
but is available up to construction period. Regarding maintenance, no
systematic maintenance schedule for old and new bridge is specified. The CA
specifies for old bridge that only routine maintenance will be undertaken by
NICE (i.e. concessionaire). It shall include painting, repairing of riding surface
and defects other than structural or major defects. Such major defects are to be
attended by Government only on own cost.
370
6. User Fee: The toll rates are effective from inception date 11-11-2000 as
specified in CA and are indexed to average of monthly WPI for revising every
year for escalation. Unlike, Chalthan ROB case, the CA is not mentioning any
rebate for frequent users. It leaves it to Concessionaire to reduce fees if suits
commercially. The vehicles carrying VIP, emergency service vans, Police etc.
are exempted from paying tolls but Government vehicles are not exempted
from paying tolls. As shown in Table: V-42, after operations of about 7.5
years, the toll rates are raised as per formula given in CA and are around 27%.
This is quite moderate toll increase as compared to Vadodara - Halol Toll
Road case wherein trucks (2axle) and buses have seen toll hiked by 87.50 %
and tolls for LCV & car/jeep is hiked by around 50%.
Table: V-42
Toll Rates Applicable Over the Time
Effective Period Car/Jeep LCV Bus/
(Toll Started from 11-11-2000) Trucks
From 11 28 33
11-11-2000 to 2-11-2002 (Initial toll rates as
specified in CA)
From 11 28 34
2-11-2002 to 5-7-2003
From 11 29 34
5-7-2003 to 6-7-2004
From 12 31 36
6-7-2004 to 27-7-2005
From 13 33 39
27-7-2005 to 5-8-2006
From 13 34 40
5-8-2006 to 5-8-2007
From 14 36 42
5-8-2007 onwards
% Increase over Starting year toll rate 27% 28% 27%
(Source: NICE office and Notifications ofMOSRT&H)
The toll rate for Bus/truck (toll = Rs. 33; PCU =3) & Car / Jeep (toll = Rs. 11; PCU
= 1) is found proportionate on PCU basis in this case. The toll rates are effective from
inception date 11-11-2000 and are indexed to WPI as given by below formula.
T,= Tox[l+(P,-Po)/Po]
Where,
Po -All India Whole Sale Price Index (WPI) on 1st December 2000;
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Pi= average of WPI from January to December of the previous calendar year on
revision date;
To =toll rate for a category of vehicle on 11-11-2000 and
Ti= revised toll rate.
Thus, the inflation is accounted for by applying WPI increase in toto
7. Free Service Roads for Local Traffic: The local traffic is not identified and
not exempted in project design. Hence, the local traffic is charged at par.
8. Traffic Risk: CA provides traffic census figures on nearby traffic count post
but it is not binding to Government for actual traffic on site. A major
stipulation is- the Company (NICE) shall be deemed to have carefully studied
the work and site condition, specifications, schedules, drawings and various
other data. It shall be deemed to have visited the site of the work and to have
fully apprised himself of the local conditions. The Company shall be deemed
to have carried out his own surveys, investigations and assessments of site
conditions. This clause relieves the Government from all risks what so ever
related to construction, toll operations. Adversely, CA is not assuring any
cover against future division or diversion of traffic.
9. State Support Agreement and Construction of Additional Toliway: No
such agreement is provided in CA. The “no compete clause” is almost absent
in this case. The CA provides that during tenure of CA, GOI will not permit
setting up of any competing bridge facility on Narmada on the National
Highway No.-8 itself. This provision is meaningless because any bridge built
on River Narmada oh nearby NH-8 location can harm the project interests.
The existing toll free Golden bridge on State highway is already working to
reducing car traffic due to free passage on Golden bridge and reduction of
approximately 2 km on length on NH-8. Of course, en route tolling of Bharuch
- Dahej State highway in near future can reduce charm to use Golden Bridge.
The only financial stipulation is imposing minimum equity requirement of
51% of total equity for NICE up to construction period and then it may be at
least 26%. This is to make NICE a major equity holder among other equity
holders atleast during construction stage. Otherwise, the CA does not include
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any benchmarks or standards for financial performance. The 'CA clearly
mentions no financial involvement (no guarantees on debts/bonds either) of
Government in any financial instrument of the Company. The CA is explicitly
asking Company to decide on Debt/ Equity ratio and type of financial
instrument to be employed in financing the project. No advance or loans are to
be provided by the Government. But in case of Force Majeure events, loans
for debt obligation are offered at rate higher than Prime lending rate (PLR)of
State Bank of India (SBI).
11. Risks, Force Majeure and Termination of Agreement: If project suffers due
to concessionaire’s default, no compensation is payable and security money
are forfeited. If project suffers due to other reasons, they mostly fall under
Force Majeure. The provision of Force Majeure events is illustrated in Figure:
V-13. This CA is elaborative for Force Majeure events and compensation
which is expressing strength of CA in exploring such events and risk
allocations. The provision of Force Majeure is divided in three types of events
as depicted in Figure: V-13. The CA is categorizing for each event, stage of
project namely- construction stage & tolling stage. The remedies are different
for all three types of events as per stage of project -mainly allowing extension
of concession period or termination of agreement. However, as such no
remedy is suggested for events happening before financial close except
termination with out any liability if such event persists for continuous 120
days. This is like not accepting any liability from Government side before
financial close. Surprisingly, the events by act of God are not accepted for
liability during construction stage and the Concessionaire is instructed to
depend upon Insurance proceeds. This means, if the project meets with e.g.
severe earth quake or floods and effect of event persists for continuous 120
days then termination will not attract any compensation from Government
irrespective of extent of investment incurred by Concessionaire. If such act of
God occurs after issuance of completion certificate by STG, at the most debts
are accepted by Government after deducting insurance proceeds. These are
quite harsh stipulations as compared to cash contracts where money is paid at
every stage of construction (mostly monthly basis) and hence only unpaid
portion of construction remains on such risks. For Indirect Indian Political
events (more common events being transportation strikes, bandh or riots),
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during construction & tolling stage are accepted for extension of concession
period and cost increments. But termination on such events during
construction allows only debt liability and thus loss of equity. However,
termination during tolling additionally allows 20% of return on equity which
is comfortable provision for Concessionaire. Similarly for Direct Political
event (at least not possible in near future as felt from Government policies),
there are comfortable provisions for Concessionaire assuring returns on equity
on both stages of project. The risk matrix is derived from CA is given in
Table: V-43. Except for unforeseen events, concessionaire bears major risks as
given in this table.
Table: V-43
Risk Allocation As Per NICE Concession Agreement
Commercial or Revenue Risk Concessionaire

Sovereign Risk Government of India
Natural Force Majeure Mainly Insurance & GOI for debts if
tolling is started
Indirect Political Events & Political Risk Government of India
& Legal Risk
Time Overrun and Cost Overrun Concessionaire
Project Risk Concessionaire
Financial Risk Concessionaire
O&M Risk Concessionaire
(Source: Derivedfrom NICE Concession Agreement)
374
Figure:V-13
Force Majeure Events & Compensation.
(Source: NICE Concession Agreement)
375
12. Lender’s Recourse: The CA is not recognizing lenders and in case of
termination, lenders have no recourse on facility under concession agreement.
However, CA accepts lender’s dues in case of Force Majeure events if the
facility has started operating.
13. User’s Recourse: The CA is not mentioning any road side facility to users
and not guiding for making complaint for inconvenience. The CA directs to
see that no bottleneck conditions arise at project site and road surface is
maintained at specified limit of roughness. But value for money that is after
paying for facility the user actually is benefited or not is not ascertained.
14. Dispute Resolution Mechanism: The CA provides scope for amicable mutual
understanding under provision of agreement through Steering Group
mechanism. In case of dispute the matter is referred to Arbitration tribunal
made of three members on mutual agreement. Delhi Court jurisdiction.
15. The CA is not defining project cost and not considering financial close as a
milestone to be monitored. Only during Force Majeure events, non
achievement of financial close matters. No privileges like BOOT projects are
given to concessionaire like development rights for land.
This medium size BOT project was supposed to be smooth sailing for the
entrepreneur. The nature of agreement dominantly resembled with traditional cash
contract and looking to the heavy traffic volume, operational aspects were expected to
be comfortable to the entrepreneur. Typically, this project has also confirmed initial
inadequacy of cash flow to cater to debt obligations and little restructuring of term
loans from banks helped the company to register profits in the account books. The
“Ramp Period” existed here also that was not taken in to account by planners in
designing of concession and by concessionaire in preparing financial plan.
Though exact financial plan/estimates at signing of concession are not accessible,

what has been implemented to construct and put the facility open to traffic is
discussed hereunder.
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Table: V-44
Financial Plan of MCE As on March 2000
(i.e. during construction stage, Rs in Crores)
Debt SBI 6.6 (12%)
IDFC 25.0 (44%)

Infrastructure Bonds 25.0 (44%)
issued to IDBI
Total Debt (55%) 56.6 (100%)
Equity Paid up share capital 46.0 (4%)

of NICE
Total Equity (45%) 46.0 (100%)
Total Funds (100%) Rs. 102.60
Total Project Cost envisaged at financial close Debt/Equity Ratio =

= Rs.l 13.00 Crores 1.23 :1 or 55:45
(Source: Annual reports ofNICE)
The Company has borrowed from financial institutions and bank and it started with
single debt of Rs. 25.0 crores during 1998-1999 (i.e. initial construction period) from
IDBI in terms of infrastructure bonds issued by NICE and subscribed by IDBI. The
bonds required fixed interest quarterly payable @ 15.5% and redeemable in four equal
annual installments commencing from January 2006. The Company preferred
conversion of this bond financing in to IDBI term loan from 2000-01 at same interest
rate. This IDBI term loan was repaid with penalty during 2002-03 by replacing this
debt with term loan of IDFC at the rate of 11%. Similarly, the interest rate for IDFC
loan was reduced to 7.5% from 14-10-2005. Also, a term loan of Rs. 6.60 crores was
taken from SBI during 1999-2000 and was added up by Japanese Yen denominated
foreign currency loan of equivalent Indian Rs. 42.80 crores looking to external inputs
of the project. The SBI Indian currency loan was fixed rate loan @ 12.6% but Yen
loan was exposed to exchange rate fluctuations. The L & T Limited - the ultimate
377
holding Company has undertaken interest rate and exchange rate risk However at the
instance of L & T limited, Company has entered into some derivative transactions for
this purpose.
Summing all such various debts, MCE has been found following own way of project
financing in absence of any surety embedded in CA or without defined lender’s
recourse. It has used bond financing, term loans in Indian rupees and foreign
currency, injected equity from other institutional investor in 2001-2002 withdrawing
own 20% equity. Of course, the debt raising capacity was based on credibility of L &
T Limited and not on MCE or project potential (which was yet to be established).
5.7.3.2 Financial Performance:
The company (NICE) has constructed the facility within 33 months i.e. ahead of
stipulate 36 months and with out cost overruns. Hence, they could start tolling ahead
of schedule as provided in the concession agreement. As a typical PPP project, MCE
also incurred operating losses mainly due to high debt obligations during initial years
& unexpected lower traffic.
5.7.3.2.1 Poor Revenue from Tolls:
The project was selected with out conducting feasibility report mainly because of
already proven need of four lanning. The Company’s anticipated traffic projections at
bidding stage are available. As seen from this comparison, up to FY 2007, the traffic
has shown deficit as compared to estimations made while bidding. Especially for
Heavy Motor Vehicles (HMV), per day vehicles are about 50% of estimates.
Strangely, the bidding time GOG census recorded HMV per at 14815 as on October
1996 and it was not realized even after ten years i.e. by FY 2005-2006. The Company
had estimated buses & trucks separately for future years but toll rate are same for bus
& truck and hence the collective no. of bus + truck (called Heavy Motor Vehicle
(HMV)) is available in actual data for traffic per day.
37S
Table: V-45
Tollable Traffic Realization in Narmada Toll Bridge Project
Year of Toll Collection Average No. of vehicles per day during financial
year (vehicle wise)
Car LCV Bus Truck
2000-2001 Estimated 3914 3577 2565 21304

Actual* 2294 2045 13116 (Bus+ Truck)
2001-2002 Estimated 4219 3852 2727 22945

Actual 2445 2015 13182 (Bus+Truck)
2002-2003 Estimated 4548 4149 2898 24711
Actual 2749 2210 13744 (Bus+Truck)
2003-2004 Estimated 4903 4468 3081 26614
Actual 3132 2311 14056 (Bus+ Truck)
2004-2005 Estimated 5285 4812 3275 28663
Actual 3867 2428 14459 (13us+ Truck)
2005-2006 Estimated 5698 5183 3481 30870
Actual 4415 2633 14757 (Bus+ Truck)
2006-2007 Estimated 6074 5499 3673 32754
Actual 4398 2733 16657 (13us+ Truck)
* All actual figures are average over no. of tolling days of respective year.
(Source: Collectedfrom NICE office)
Apart from unexpected shortfalls, NICE has also faced monthly variation as seen
from month wise toll collections. The revenue of NICE is function of No. of vehicles
and prevailing toll rates. The revenue is found varying seasonally and surprisingly, at
every toll revision, the total collection has actually fallen marginally and then
recovered on rising trend. This reduction is mostly found in all categories of vehicles
but more in cars/jeep. The toll increase is always marginal in this project and hence
the revision is not having long term effect on revenue.
379
Figure:V-14
Monthwise Toll Collection For NICE
The seasonal reduction due to Force Majeure events like Gujarat riots in March 2002
is evident from Figure: V-14 . The tolling in monsoon period during August to
September every year is typically exhibiting slump for this project. Hence, unlike
constant rate of debt and O&M charges, revenues are not received at constant rates.
Reasons of Shortfall: In absence of feasibility reports, the traffic shortfalls could

mean poor quality of input data maintained by GOG in terms of traffic census, traffic
disruptions due to dilapidated condition of old bridge and overestimation of traffic
growth by concessionaire in submitting bid. Otherwise for interstate traffic plying on
NH-8, no competitive route is alternatively available atleast for heavy vehicles.
S.7.3.2.2 Financial Distress in Debt Servicing And Restructuring of Debts BY

NICE:
Evidently, after incurring project cost of more than Rs.100 crores the poor turn out of
traffic put the company in distress. The year wise financial operations of NICE are
summarized in Table: V-46: A to C. Like other cases, NICE has also faced operating
loses till FY 2005. The company has not maintained adequate equity leading to heavy
debt servicing as compared to revenues. However debt restructuring discussed under
subsection 5.7.3.1 has reduced interest charges and has in turn reduced operating
losses. The Company has maintained the Debt/Equity ratio at 2:1 up to FY 2004 and
then reduced the debt component achieving D/E 1:1 in FY 2007. Otherwise, the
project revenues have not seen any jump to increase the profitability of project.
380
Table: V-46:A
Operational Performance Of NICE
(Rs. in crores)
Financial Year Total Interest Depreciation Operating PBT
Ending 31s* Income paid expenses**
March (excl. Int &
Dep)
1 2 3 4 S
6=2-3-4-5
2001* 7.94 5.01 4.8 0.92
-2.97
2002 19.77 13.67 11.79 1.73
-7.42
2003 23.22 12.05 11.79 5.06
-5.69
2004 22.95 6.49 11.81 5.00
-0.34
2005 27.56 6.14 11.83 7.242.34
2006 31.23 5.06 11.84 8.835.49
2007 32.10 3.69 11.82 4.44
12.15
% for 2007 100% 11.50% 37.0% 13.5%
38.0%
Note:
• It is from 11-11-2000.
** O&M includes exchange losses and professional fees for bridge works and these
two attributes more than half of O&M expenses.
(Source: Annual Reports of NICE)
Table: V-46:B
Movements in the Long Term Sources of Finance for NICE (Rs. in crores)
Financial Secured Owner’s Accumulated Misc. Adjusted
Year loans Equity net of P/L Exp. Not Net worth
(Paid up A/C carried Written
shares to reserve & off
4-reserves1) surplus
(1) (2) (3) (4) (5) (6=3-4-5)
2001 93.14 47.35 -2.9 0 44.45
2002 94.65 47.35* -10.32 0 37.03
2003 95.69 47.35 . -16.0 0 31.35
2004 97.28 47.35 -16.35 0 31.00
2005 83.64 47.35 -14.20** 0 33.15
2006 65.08 47.35 -9.17 0 38.18
2007 48.64 48.96^ 0.0 0 48.96
Note:
1. The Company has not maintained any reserve up to FY 2006 and entire equity is held
by L&T & its subsidiaries up to FY.2001.
2. The company has first time created reserve of Rs.1.61 crores in 2006-07 carried
forward from P/L account.
* The equity holding from this year has changed but amount of paid up equity has not
changed. From this year Rs. 9.47 crores of equity is provided by Consolidated Toll
Networks India Pvt. Ltd.
** The FY 2005 is very first profit making year since inception.
(Source: Annual Reports ofNICE)
381
Figure:V-lS
Operational Performance Of NICE

Rs. In Crores
a Total income B Interest paid ■Depreciation 0 Operating expenses** (excl. Int & Dep) S3PBT
(Source: Annual Reports ofNICE )
Figure: V-16
Movements in the Long Term Sources of Finance for NICE

Rs. in Crores
(Paid up shares owner's of P/L A/C carried worth

+reservesl) equity+secured to reserve &
loans) surplus
(Source: Annual Reports ofNICE)
382
Table: V-46:C
Leverage Ratio for NICE
2001 1.97 2.10 33.70
2002 2.00 2.56 33.35
2003 2.02 3.05 33.10
2004 2.05 3.14 32.74
2005 1.77 2.52 36.15
2006 1.37 1.70 42.12
2007 0.99 0.99 50.16
(DerivedFrom Table:V-46;B)
The Table:V-46:A &B are showing operational inadequacy of project though the
project is awarded on most busy corridor of NH-8.The Table:V-46:C is depicting
need of equity funds to the range of 50% of total funds. The financial structure of
NTBCL and VHTRL (GTRIL) have also shown recent proportion of owner’s funds
above 50% (Table:V-19 AND 36:C respectively). Hence, a common issue of higher
debt is faced by all three concessionaires. This could have been sorted out by proper
preparation of base case scenario at bidding stage.
5.7.3.3 Analysis of Issues Due To Lacunae in Concession Agreement:
This is a Price Cap regulation based concession agreement. The Price Cap type of
concession design has seen two revisions (MCA 1999 and 2006) incorporating capital
grant support and revenue sharing (in terms of yearly varying concession fees) and
partial traffic guarantees. Still this case has many aspects to analyze fro actual
execution. Following points are raised from study of concession agreement and
available relevant details for its practical implication in construction and operation.
The lacunae pointed out in this CA are leading to suggest appropriate corrections for
future works.
1) NICE is facing issue of local trucks/buses/LCV demanding rebates on frequent

journeys. The Company has conceded the demand by issuing monthly passes
and return tickets and the other users are also offered 4% extra trips if they
prefer to prepay for 100 journeys (every 50 journey advance payment is valid
for 180 days). This was a compromise to settle daily public resistance but such
383
provision is not available in CA. The Company is expecting reimbursement of
losses due to issuance of daily and monthly passes to local users. MOSRT&H
has already directed such rebates for local users if project is undertaken using
GOI funds or it is annuity based project but not for BOT (Toll) projects.
2) The Company is also putting extra efforts to stop toll evasions because; there
are two offshoots from Vadodara side after crossing the toll plaza -one for
Nilkantheshwar Mahadev Temple & other is for Government Circuit House.
Similarly, a major junction (cross roads) for diverting traffic to Shuklatirth is
available before toll plaza. Also, once the bridge is crossed then there is no toll
plaza on Mumbai side. NICE has deployed personnel to collect tolls from
users using these links and joining the toll road after toll plaza. The Company
calls it offline toll collection (toll collection computers at windows of toll
plaza are connected with control room) and controls evasion using extra
manpower. The tolls collected while disruption of computer network at toll
plaza is also labeled as offline toll collection. Hence, quantum of evasive
traffic is not precisely known in this case. For example, the offline toll
collection for March 2007 was about Rs. 12,291.0 as compared to total
collection of Rs. 2.72 crores in that month. But NICE has to spend even more
than offline collection to avoid toll evasion due to site conditions.
3) A major hitch found by NICE is tendering exact coins while collecting fees
from road users. The NICE has stated need of more than Rs. 15.00 lacs per
month due to fixation of fees at intermediate figures. Every month NICE has
to arrange for such coinage from banks, religious institutes etc. to reduce
transaction time. The cost of such coin collection is generally 5% of it but
carries risk of transporting to toll plaza every month.
4) The NICE can revise toll rates only after getting notification from GOI which
never comes in permissible time limit. This delay is admissible for claim but
CA provided extension of toll period to accommodate revenue losses in such
events. The Company has already claimed for loss of revenue due to delay in
toll rate revision as below.
384
Table:V-47
Claim for Delay in Toll Rate Revision for NICE
Toll Rate Due date of Actual date of No. of days of delay in
Revision toll revision toll revision revising toll rates
FY 2002 1-4-2002 2-11-2002 215 days
FY 2003 1-4-2003 5-7-2003 95 days
FY 2004 1-4-2004 6-7-2004 96 days
FY 2005 1-4-2005 27-7-2005 117 days
FY 2006 1-4-2006 5-8-2006 126 days
FY 2007 1-4-2007 5-8-2007 129 days
(Source: NICE & GOG Offices)
The NICE has claimed for total Rs. 20,792,019.00 as a principal amount as per
no. of vehicles passed paying tolls at old rates. Adding interest (at varying rate
as per actual cost of borrowing being faced by NICE year to year) of Rs.
16,292,863.00 it totals Rs. 37,084,882.00 at the end of concession period. The
CA is providing compensation of such event by extending concession period
hence NICE has used its cost of borrowing money to derive interest of
respective FY up to end of concession. Of course, the loss is to be recovered
on the end of concession that may hamper project cash flow adversely.
Surprisingly, the toll revision notification has come always late though the
indices are available and proposal is generally submitted by NICE in time.
Actually, there is no need to demand proposal from NICE. GOI it self
publishes data and it can revise toll rates as per escalation formula provided in
agreement which requires no extra input from NICE.
Like MCA (2006), here also no formulae to calculate extension of concession

period are available to the concessionaire from CA. Hence, claim from NICE
may not be accepted in toto for extension of concession period as Steering
Group may work out equivalent days of extension based on own assumptions.
5) The CA has another drawback that affects the bankability of project. No

outright formulae for calculating revenue loss compensation during operations
affected by Force Majeure events or admissible events are provided in CA.
The CA is providing compensation when operations are totally stopped or
agreement is terminated. The earlier auction contract of toll rights awarded by
Government on old bridge on River Narmada had this feature. In this contract,
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the concessionaire was to remit agreed amount twice in a week to the
Government irrespective of actual toll collection. In the event of any loss of
revenue in toll tax being more than 50% of average daily collection of last
seven days(event persisting for more than 24 hours) average daily collection
for last seven days before notification of event was taken as a yard stick and
any deficit is allowed as rebate to remittance by Concessionaire to
Government.
6) The CA is not distinguishing various trucks on the basis of axles. Hence, the
toll rate for trucks was allowed only Rs. 33 on inception irrespective of axle
pattern. In Vadodara- Halol Toll Road, every axle (beyond usual 2 -axle)
attracts extra 66% of toll for that truck. The NICE has raised the matter with
MOSRT&H for consideration of growing proportion of Multi Axle Vehicles
(MAV) on Narmada bridge. This is quite appealing because, induction of
MAV by transport operator helps him loading 50% to 100% or more in a
single truck which in turn reduces no. of tollable vehicles on the bridge. The
NICE has contention that such reduction in traffic is exogenous to the project
and hence some toll adjustment is needed.
Table: V-48
Increase of MAV in Total Truck Population For NICE
Period of observation No. of total No. of MAV % of MAV
HMV (truck + passing the in total
Bus) passing toll plaza popniation
the toll plaza of HMV
Sept 2001-March -2002 400029 4811537 8.3%
April 2002- March -2003 1021413 5016509 20.4%
April 2003- March -2004 1254000 5130470 24.4%
April 2004- March -2005 1568354 5277575 29.7%
April 2005- March -2006 1723335 5386417 32.0%
April 2006-March-2007 2035195 6080027 33.5%
(Source: NICE & GOG Offices)
The above issue is quite suggestive of technological risk being carried by

NICE. Since the concession is designed in this case on Price cap basis, the
Sovereign is unable to appreciate the contention of NICE to introduce higher
toll rates for MAV. This is in a view to disallow any profit other than agreed
terms.
386
7) The risk identification and allocation is mainly matter of claims put up to STG
for considerations by affected party and STG has no time bound obligation to
decide upon such claims. For example, the claim of NICE for revenue loss so
far due to late notification of revised fees from 2002 & revenue loss due to
riots 2002 is yet not decided. The Force Majeure events are of prime
importance because they are indicating course of action under events not
anticipated and even after due diligence, affecting the project interest to the
extent some times leading to termination of the Concession Agreement. Such
events are not planned for and hence disrupt cash flow and lenders are most
wary of such circumstances. The stipulations under CA for Force Majeure
require undergoing lengthy route of Dispute Resolution since there is always
miss out for time bound decision when a project undergoes unusual
circumstances.
8) In case of NICE, the tolling history of existing bridge helped in absorbing new
project. But in later years, the dilapidation of old bridge forced the
Government to close the old bridge many of times (total more than 10 months
that included one spell of continuous seven months) for repairing structural
defects. The closure of old bridge means reducing four lane capacity of facility
to two way but tolling continues on agreed toll levels of four lane facility.
When existing traffic is in need of six lanning (six lanning is already taken up
by L&T on Vadodara- Bharuch stretch of NH-8 on BOT basis) a single
moment of old bridge closure creates long queues & traffic chaos on new
bridge. The lengthy spells of continuous closure of old bridge created
enormous stress for NICE because they were collecting tolls for four lane
facility.
5.7.4 Policy Implications From Case Study:
The policy implications covered for Chalthan ROB are applicable for NICE case
study being typical for Price Cap regulation. The issues of non availability of reliable
traffic data, unattended issue of local traffic and tollable traffic, ignorance for project
cost and project revenues, speculation allowed for future traffic etc. are in need of
attention keeping in view methodical concession design of IL&FS cases. These
aspects are already discussed for Chalthan ROB case. A conceptual model explaining
387
working of NICE agreement is depicted in Figure: V-17. The dotted square suggests
remedies to this agreement as discussed under subsequent subsections.
Figure: V-17
Conceptual Understanding of NICE EOT Project
This figure illustrates Public pays and receives services whereas concessionaire
invests in the project and receives toll income. Government awards concession rights
and receives back facility at the end of term. However, cornerstones for Price Cap
regulations in CA designed so far for NH works including MCA (2006) are not
definable as all these agreements only mean upfront investment from concessionaire
and tolling for fixed price and fixed period permitted on public assets with all
uncertainties remaining unanswered. Hence the model under Figure: V-17 is quite
open ended unlike IL&FS case.
5.7.4.1 Remedy to NICE Agreement:
For sustainable PPP, neither unplanned profits nor unplanned hardships shall be
allowed by virtue of careful concession agreement as discussed for NTBCL and
VHTRL case. As a major policy suggestion, the concession shall not be a speculation
business considering public nature of the road sector. Also, it should not be literally
build-operate- transfer on recovery of investments or at the end of term. The
concession shall be focused on achieving lower prices to the users or shall render
38S
superior services to them instead of focusing merely on passing over investment
obligation to private sector (Kerf et al. 1998).
The NICE agreement is surely not imposing any extra burden on Public except as
stipulated by MOSRT&H for all permanent structures on NH. Almost 70% of
concession period is passed so far by NICE. The NICE has passed Ramp Up period to
enter into smooth operating period now onwards. A re-auctioning case with an
objective to reduce tolls for Public concern is always desirable. However considering
project specific requirements, the re-auctioning bid shall focus on construction of new
bridge on Narmada River to avoid this stretch of km 192/0 to 198/0 of NH-8
becoming bottleneck among NH-8 between Vadodara- Surat. This is inevitable
considering dilapidated condition of old bridge (Sardar Bridge) on River Narmada.
Hence, the future cash flow shall accommodate this cost in initial years of new
concession period itself. To introduce free competition, such modified scope of
project will require termination of NICE agreement. The termination of NICE
agreement is possible under provision of Force Majeure (Direct Political Event) and it
will require paying NICE all outstanding debts and return on paid up equity at 20%
for remaining term (up to December 2012).
S.7.4.2 NPV of Future Cash Flow & Future Financial Management:
The proposed termination for inviting bids of re-auctioning of concession will attract
compensation to NICE as per Table: V-49:A assuming agreement is terminated on
31st March 2007. Hence, it is required to pay NICE Rs. 133.73 crores to terminate the
agreement by 31st March 2007.The potential of future cash flow is worked out in
Table: V-49:B based on following assumptions. The NPV from these estimates of
future cash flows is tabulated from Table: V-49:C assuming various discount rates.
Assumptions:
1. The known value of Rs. 32.1 crores of revenues for 2006-07 is adopted as a
base value. The revenue has increased from Rs. 19.77 crores to Rs. 31.2 crores
from FY 2002 to FY2007. The average of year to year percentage increase in
revenues for above period is found 11% per year. Here, the toll revenue is
assumed to increase every year by 6%( for inflation) similar to NTBCL case
389
and additionally, moderate traffic growth of 5% per year is assumed which
combinely gives 11% (i.e. 1.06x1.05=1.11) growth per year and that matches
with actual past growth of revenue as checked above. This is in fact very much
underestimation of toll revenue for NICE case. Because, the past records were
based on four lane facility and this academic case is based on assumption to
create six lane bridge by end of FY 2010. The traffic volume will be enormous
(designed capacity increases by 1.5 times) due to six lanning of bridge. In fact,
once the six lanning of NH-8 between Vadodara- Surat is completed by end of
FY 2009, the existing four lane bridge will start getting enhanced traffic.
2. The O&M for NICE has remained so far as around 20% of toll income as per
percentage of total O&M expenditure found (Rs.32.3 crores) for period of FY
2002-2007 of revenues in that period (Rs. 156.83 crores).Here, O&M is
assumed at 20% for managing operations and periodic repairs for future years.
After FY 2010, the revenues will be for six lane traffic and O&M expenses
shall be less than 20% of revenues. Hence, it is little overestimation of O&M
expenses when six lane bridge starts operations after FY 2010. Most
importantly the estimated cost of third bridge of Rs. 300 crores is added in
O&M cost of existing project. The cost of Rs. 300 crores is divided among FY
2008 to 2010 equally.
3. The Depreciation amount is assumed for tax purpose. On safer side, same
amount of Rs. 11.82 crores is maintained for all years. The second bridge is
any way accounted for full depreciation by FY 2012 and then third bridge is
getting accounted for depreciation. The assumption is too simplified and it
gives taxes on higher side which makes the assumption of depreciation on
safer side. NICE has shown profits from FY 2005 but after re-auctioning,
profit starts after FY 2010 and hence, first ten years of operations from FY
2011 are taken for Minimum Alternative Tax (MAT) and then regular tax rate
on the lines of NTBCL case is assumed. The operational income is available
from FY 2008 though construction of third bridge is assumed underway
during first three years of new concession.
4. The net cashflow after deducting outflow is discounted at 9.5% considering
Halcrow estimates (in NTBCL case) of cost of capital. Since, existing CA
mentions 12% rate of discounting and returns on equity at 20% for
compensating under Force Majeure, both rates are also attempted in deriving
390
NPV. For this case, 12% discounting rate will be more relevant looking to the
provision in CA. The future cash flow is estimated up to FY 2030 and NPV is
found for those years from FY 2007 when NPV reaches amount little above
amount (Rs. 133.73 crores) to be compensated to NICE.
The whole idea behind this exercise is to check potential for paying back NICE the
compensation payable at end of FY 2007 and incurring additional cost of Rs. 300
crores for third bridge on River Narmada between FY 2008-2010.
Table: V-49:A
Compensation to NICE On Termination
Sr. No. Attributes Rs. in crores
1 Residual Debts 48.64
2 Paid up Equity 47.35
3 20% Yearly Returns on Paid up Equity 37.74
FY 2008 9.47
FY 2009 9.47
FY 2010 9.47
FY 2011 9.47
FY 2012 9.47
From 3/2012 to Dec/2012 7.10
Discounted @12% =37.74
Total Compensation 133.73
(Source: Derived From NICE Concession Agreement Provision)
The estimates made under Table:V-49:B and C explain need for stretching new
concession period from 1-4-07 to 31-3-2025 to accommodate construction of new
(third) bridge while maintaining old and second bridge in trafficable conditions. The
desirable bidding criterion is possible to include for reduction in tolls as it was worked
out for NTBCL case. The exercise in Table:V-49:B and C is based on toll levels fixed
as per NH rules for permanent structures (that is provided as initial toll rates
applicable on opening date of operations) and these toll rates adjusted for subsequent
inflation up to FY2030. However, projections up to FY 2025 are found ample to
serve the objectives of new concession agreement- to pay back NICE for termination
and to incorporate construction of new bridge immediately to match with six lanning
of Vadodara- Surat stretch. Additionally, a toll rebate of 10% is applied to toll
projected from FY 2008 to 2030 similar to NTBCL case and the results are
summarized in Table:V-50
391
Table: V-49:B
Estimation of Future Cashflow for NICE (Rs. in crores)
Financial Total Income O&M# Depreciation Income Tax* Net Flow
Year
2008 35.73 107.15 11.82 0 -71.42
2009 39.76 107.95 11.82 0 -68.19
2010 44.26 108.85 11.82 0 -64.59
2011 49.26 9.85 11.82 3.03 36.37
2012 54.83 10.97 11.82 3.52 40.34
2013 61.02 12.20 11.82 4.07 44.75
2014 67.92 13.58 11.82 4.68 49.66
2015 75.59 15.12 11.82 5.35 55.12
2016 84.13 16.83 11.82 6.10 61.20
2017 93.64 18.73 11.82 6.94 67.97
2018 104.22 20.84 11.82 7.87 75.50
2019 116.00 23.20 11.82 8.91 83.89
2020 129.10 25.82 11.82 10.06 93.22
2021 143.69 28.74 11.82 34.72 80.24
2022 159.93 31.99 11.82 39.09 88.86
2023 178.00 35.60 11.82 43.95 98.45
2024 198.12 39.62 11.82 49.37 109.12
2025 220.50 44.10 11.82 55.40 121.00
2026 245.42 49.08 11.82 62.11 134.23
2027 273.15 54.63 11.82 69.58 148.95
2028 304.02 60.80 11.82 77.89 165.33
2029 338.38 67.68 11.82 87.14 183.56
2030 376.61 75.32 11.82 97.44 203.85
Note:
# O&M taken as 20% of toll income for managing operations and periodic repairs.
* IT. taken at 11% (MAT) for first 10 years of operating profit making years i.e. up to 2020
& then 33.66% .It includes cost of Rs. 300 crores to be incurred for construction of third
bridge. This cost is divided in three equal installments of Rs.100 crores for FY 2008 to
2010. Knowing the fact that toll income for FY 2007 is about Rs.32.10 crores, every next
year toll income is raised by 5% per annum for traffic growth and 6% for inflation and
above financial statement is worked out.
(Source: Derived based on own assumptionsfor known value oftoll collectionfor FY2006-07)
392
Table: V-49:C
Estimation of Future Cashflow for NICE Case (Rs. in erore)
Concession NPV at 9.5% of NPV at 12% of NPV at 20% of
period up to discount rate discount rate discount rate
Up to FY 2012 -120.37 -118.10 -110.50
Up to FY 2022 143.04 90.51 -5.70
Up to FY 2025 213.04 138.19 9.09
(Based on above assumptions and estimated cash flow)
S.7.4.3 Objective of Instating New Concession:
After proposed terminating the concession awarded to NICE, the new agreement shall
be focused on constructing additional bridge and shall provide upfront payment to
NICE amounting Rs.138.19 crores as termination compensation. However, the project
has potential to accommodate toll rebates also as worked out under Table: V-50. The
NPV shown in this table is worked out for reduced revenues by 10% in Table:V-49:B.
The Table: V-50 shows within accepted assumptions, the toll reductions of 10% are in
need of extension of concession period further by two years. The delayed toll rebate
of 10% effective from date 1-4-2015 is found able to serve the objectives of new
agreement within concession period of FY 2025. Hence, the popular objective of toll
rebate is possible to work out in this case too. The underestimation of traffic even
after six lanning can give scope for toll rebates in any case. It is quite possible that
NICE itself may bid for new concession offering highest
Table: V-50
Effect of reducing tolls on estimated NPV for sell out
Options Toll reduction Assumed from NPV as on 31-3-07 % Reduction in NPV
Rs. in crores for estimated earlier i.e.
cash flow 2008- Rs. 138.19 crores
2025
Option- Reduce toll for all users by 112.58 18.5%
1 10% from first year starting
from 1-4-07
Option- Reduce toll for all users by 121.46 12%
2 10% after completion of third
bridge, starting from 1-4-2010
Option- Reduce toll for all users by 132.46 4%
3 10% starting from 1-4-2025
Note: The extension of concession period from 2025 to 2027 is yielding NPV=Rs. 140.59
crores.
(Source: derivedfrom Halcrow data as in above tables)
393
All the academic estimates for NTBCL, VHTRL and NICE suggest importance of
base case at bidding stage. The Government shall have own calculations based on
sound assumptions of various financial scenario to arrive at optimum expectation
from agreement and this will give negotiation power to Government based on own
calculations. Presently, in case of NH segment and in particular for all Price Cap
regulations based concessions, Government and bidders do not emphasis on
preparation of proper base case. A typical negative cashflow for initial six-seven years
can not be left to the Concessionaire when the asset being managed is public utility.
This is very important especially when agreements seen so far are not having any
reserve for maintenance. The interstate traffic will have no option except to pay and
go through poor service standards when a company is unable to serve debt obligations
and has no spare money to incur on maintenance. Thus, though project cashflow may
be showing attractive returns on summing up, the stress period typical for toll roads
on “Ramp Up” needs proper attention. Then further stream of handsome net flow may
be reviewed periodically if the Government has supervision for Public interests. Such
mechanism will not only curb abuse of monopoly power, it will also offer call option
to investors if they are not comfortable with on going project operations. All of these
case studies have brought out the fact that debt servicing hampers operational aspects
severely. The base case shall be worked out to define actual debt service limits year to
year basis that will require lower Debt/Equity Ratio during initial years and hence
comfort to lenders too. The mezzanine financing or subordinated debts from investors
shall be beforehand worked out to assure lower costs of funds and lower project costs
because, any Government is awarding BOT project on the assumption that bidder is
bringing investment that is not available in the chest of Government. Hence, the
objective of new concession shall be focused on lower project cost integrating local
site condition requirement of future expansion. The lower project cost shall be
translated into lower toll levels as compared to presently available benchmark of NH
Fee Rules. As ascertained from case studies undertaken herewith, the inability of
Government to anticipate future public policy objectives or network capacity needs
accurately requires flexibility in Concession documents. Essentially, the concession
shall be flexible to accommodate for local requirement in terms of change in scope, it
shall be flexible to embed re-auctioning at achievement of decided datum e.g.
achieving 85% of expected NPV or 85% of concession period which ever is earlier.
This 85% figure shall be actually worked out from sound base case calculations on
394
case to case basis. The aim of such re-auctioning shall be renewal of efficiency or
renewal of monopoly power as the case may be to facilitate concessionaire in
adjusting with changing scenario with ultimate goal to serve the Public at lower cost.
Of course, any failure in obtaining suitable bids shall mean continuation of original
concession agreement.
SECTION-111: PRIVATE PROJECT FINANCING ASPECTS
5.8 PRIVATE PROJECT FINANCING ASPECTS IN CONCESSION

DESIGNS:
In PPP, private concessionaire signs the project for making investments that is not in
capacity of owners of sector (i.e. Government). However, practically the
concessionaire invests minimum and leverages on- his image, strength of contracts (as
per bankability of agreement) and his equity contributions. If it was matter of raising
debt from market, any government could have done better than these candidates. But
the issues of efficiency and self-financing place greater trust on private players in
constructing & operating such facilities. The run for profit is recognized as an
adequate incentive (which is also cause of all worries for Government) to carry out all
multi-faceted activities required under PPP project at better efficiency than
Government bodies. This in turn requires to recognize the real partner of any PPP
project i.e. lenders and bankability of CA to win the confidence of lenders. Ultimately
it is mainly the lenders who shall face various risks and issues in carrying out PPP
project. IL&FS has prudently accepted the role of lenders and has got Government
signed Direct Agreement with lenders for underwriting the debts whereas NH
segment is not recognizing lenders for direct responsibility of Government for
repayment of debts even in MCA (2006). Right from Sovereign to concessionaire,
financing of PPP projects is passed on to lenders that is mainly banks and concession
in NH segment are awarded with out any recourse to balance sheet of sponsors or
Sovereign.
Keeping in view enormous traffic on corridors like NH-8, the BOT projects can be
viewed or construed as “ring-fenced” projects having potential to accommodate
leveraged financing despite no major guarantees. This is possible on the basis of
rights to collect tolls for many years leading to future cash inflow sufficient to serve
395
obligations & credibility of main sponsors behind the SPV created for the project.
Here, physical assets can not to be pledged but lenders have first call on the project’s
net operating cash flow. The right to collect tolls conferred upon by Sovereign herself
is almost like Sovereign guarantee for profits except project is perplexed under
exceptional cases like Force Majeure events or in case of diversion/division of
estimated traffic. A stable yearly future cash flow of toll revenue less obligations is
capable of self reliance except during initial Ramp-Up period. Hence, financing of
such projects can be solely based on toll revenues if feasibility reports confirm the
commercial viability based on income & expenditure projections. Thus with out
taking recourse to investors’ balance sheets or their assets, the BOT projects can be
financed at least on a busy corridor. The “ring-fenced” type of financing of such
projects will put pressure on all stake holders (lenders and equity holders) for efficient
construction & operations of project. The equity of investors is able to earn returns
only if project operates efficiently & successfully. For making it a single goal
enterprise, the investors form Special Purpose Vehicle (SPV) or Special Purpose
Company (SPC) to make no recourse or limited recourse entity with compulsion to
excel within the ambits of a single project with fresh balance sheet. But project
finance requirements for viability of project is seldom discussed under any CA which
makes the whole business within the jurisdiction of traditional engineering firms who
are investing and waiting for recovery of investments under such projects. Hence, the
PPP projects have remained more of technological for the sector than matter of
financial management. The bankability of project is proclaimed in rhetoric but not
worked out for individual project finance requirements. This will also require rating
of toll road projects for attracting for example bond financing and host of other debt
instruments. In fact project financing is a tool for assuring not only viability of project
but also to influence cost of project in the interest of Public. Unlike usual “financing
of projects”, project finance is a seamless web that affects all aspects of a project’s
development and contractual arrangements (Yescombe 2002). Hence the financing of
BOT projects (considered to be candidates of non- (or limited) recourse financing)
can not be left off concession agreement for viability of projects. This view can be
interpreted to make a room for financial detailing of project operations in the CA
itself or through separate covenants for smooth financial operations leading to
viability of project & pricing benefits to Public. This view is complimented by
Chandra (2002) stating that through a comprehensive web of contracts, every major
396
risk is allocated to the party/parties best able to manage it. But Chandra (2002) further
argues that the concept of seamless web by means of project finance for success of
project along with curbing abuse of monopoly power of Concessionaire is valid albeit
remains incomplete as long as financial leverages, organizational structures ( selection
of various stakeholders for equity) is not well understood. Hence, a blind stipulation
of 70:30 Debt/ Equity ratio will not serve the purpose if a project specifically can
manage 100% debts at some stage or requires more equity during “Ramp Up” period.
The problem with toll roads is, they are essentially viewed as civil engineering
projects for fall tenure of Concession and Concessionaires are generally construction
companies unlike exception of IL&FS. Hence, initial equity for project comes from
such traditional construction companies. Since the highway projects are completed
using established technologies, very little scope is found during operation stage for
Construction Company to retain establishment. In well developed financial market of
UK, traditional construction companies tend to sell their all or some of equity in wake
of financial constraints (blocking of equity that prevent the construction company
taking up another civil work) faced on longer run. Hence diminishing appetite for
equity investments by such traditional construction companies paves way for entry of
financial participants. The PPP-Private Finance Initiative (PFI) experience in UK
suggests that emergence of a new class of mezzanine investors and the pressure on
the construction companies to cash in on their investments has led to the growth of a
secondary market for such investments though operating slowly at present (Monnier
et al. 2003).
The injection of equity and drawing of debt at appropriate time can seriously
influence cost of a PPP project. Knowing the fact that equity is patient funds though
expectation for returns is higher than lenders, any of above case studies could have
sustained better if D/E was specified appropriately during “Ramp Up” periods. Any
stipulation for higher equity during “Ramp Up” shall not be viewed negatively since
Government is anyway expecting the Concessionaire to invest upfront totally itself
under PPP route. After “Ramp Up” period, stable cashflow could attract refinancing
of project at lesser cost & larger leverage. Then the initial investors could be allowed
to sell equity at some premium and thus these could be back -loaded debt structures
and may lead to longer term of debts. The toll projects facing construction & traffic
397
risks need a higher equity commitment versus those in steady state operations.
Recognizing the growing value of most of such user-pay toll roads and prudent
repayment of equity over time through additional leveraging by a sponsor is not
viewed negatively as long as growing future toll road or Concession value adequately
compensates for the equity take out (George et al 2007). Such financial engineering
will require proper financial market also. The GOI has already set up Infrastructure
Development Finance Company (IDFC) in 1997 as a public limited company with
initial share capital of Rs.30 million to usher private capital flow in infrastructure
sector including roads. The IDFC has now over Rs. 1000.0 crores of paid up share
capital and it is built up using merely 25% of GOI money and remaining from
institutions/banks like IDBI, IFCI, SBI, HDFC, ICICI and through public
subscription. The IDFC has full influence over making of Concession agreements for
BOT based projects and specifically Annuity based projects on NH. However, the
IDFC has yet to score on envisaged role of connecting PPP projects with potential
long term investors like banks & insurance companies and thus enabling development
of long term borrowing market. By March 2005, IDFC has limited its role mainly as a
provider of senior loans to the extent of @ 80% of disbursement so far. The IDFC has
reported cumulative disbursements of Rs. 10,484 million financing 1,100 kilometers
of National & State Highways under the BOT model (IDFC Red Herring Prospectus
June 2005). The Rakesh Mohan Committee and subsequent Working Group of RBI
had expected that IDFC would provide credit enhancement products, refinancing
instruments which are not significant so far. Thus, the vision for project financing is
found on anvil since 1997 albeit the structuring of PPP projects is yet to be influenced
by principles of project finance.
5.9 CONCLUSIONS:
The study of above four cases has provided many insights into real operations of PPP
project. Many operational issues like- inclusion of precise formulae for compensation
for Force Majeure events, State partnership in compliance of manifold regulations,
setting up tolls on actual service standards basis and speedy procedures of Oversight
board/Steering Group need specific inclusion in concession agreement. For users,
these are only projects demanding tolls on use irrespective of type of project design
adopted. But for the investors, it is presently only,a speculation business looking to
398
the provision of concession agreement of these four cases or the MCA (2006). The
planners of PPP projects are not allowing assured returns atleast on National
Highways and mystery of traffic volume at planning and management stage remains
unresolved with an understanding that it is risk-return relationship. The IL&FS has
provided good financing model based on rate of return regulation which is in fact very
close to Least Present Value model suggested by World Bank much before planning
of these projects in India. The IL&FS cases are prone to criticism owing to lack of
competition allowed at approval stage and monopoly powers being assigned to private
concern for such a long period which seems to be endless as discussed above in cases
of IL&FS. For comparative illustration, all four cases are briefed in Table: V-51.
399
Table: V-51
Comparative Illustration of Selected Four Case Studies
Sr. Case Approx. Agreed Type Occurrence of Major Issues in Major Issues in Managing
No. Study Project Concessio of Cost Overrun Planning Project Project
Name Cost on n Period Regul and Time
completi Duration ation Overrun up to
on (Rs. (Actual starting of
in crore) Date of tolling (Yes/No)
Starting
Tolling)
Chalthan 12.70 18 months Price Cost 1. Local traffic was 1. Due to flaw in planning
ROB for Cap Overrun=Yes ignored and tollable and bidding (i.e. both parties),
constructs Time Overrun= traffic was not litigation, mob resistance to
n plus 23 No - assessed by any toll were faced by
months party. concessionaire single handed.
and 5 days 2. Planned like civil
for tolling work cash contract
400
(toll started but without any
from date guarantee.
19-7-1998)
Case Approx. Agreed Type Occurrenc M ajor Issues in Planning M ajor Issues in
£ ©
<a Z
Study Project Concessio of e of Cost Project M anaging Project
Name Cost on n Period Regul Overrun
coinpleti Duration ation and Time
on (Rs. (Actual Overrun
in crore) Date of up to
Starting starting of
Tolling) tolling
(Yes/No)
Cl
NOIDA 416.33 30 years Rate Cost 1. The planning o f project 1.Due to many guarantees,
Bridge (including of Overrun is based on secured returns and without competitive
construction Return =No for long term and without pricing, toll rates are high
period)or Time competition. and tenure o f agreement is
on Overrun = 2. The planning allows endless.
recovery of No one partner (IL&FS) to 2. Flaw in estimating
investment play many conflicting traffic and inadequate
at 20% roles for commercial financial planning led to
return gains. The representative enormous losses. Losses
whichever o f Public (Government) is are borne by users as per
is earlier made partner of agreement.
(toll started commercial interest. 3. Involvement of
from date 3. Improper financial Government in
7-2-2001) planning and faulty traffic commercial activities
estimates rendered public without
any stand in the
mechanism.
Case Approx Agreed Type Occurre M ajor Issues in M ajor Issues in
o3 Z
Study Project Concessio of nee of Planning Project Managing Project
Name Cost on n Period Regul Cost
complet Duration ation Overrun
ion (Rs. (Actual and
in Date of Time
crore) Starting Overrun
Tolling) up to
starting
of tolling
(Yes/No)
NOIDA 4. All activities before 4. BOOT allows

Bridge commencement to commercial
construction are not development of project
given any time bar. In assets but was found
fact, time overrun and .
of no use in actual
cost overrun has no conditions.
relevance by virtue of
402
agreement.
1
;
o
</>
>
<
<
00091
CO
Vadodara 30 years Rate Cost As Above
- Halol (after of Overrun=N
road completion Return 0
of Time
construed Overrun
on) or on = No
Case Approx Agreed Type Occurre Major Issues in Major Issues in
C o
Z
Study Project Concessio of nee of Planning Project Managing Project
in Date of Time
Tolling) up to
starting
of tolling
(Yes/No)
m
•
Vadodara- recovery
Halol of
road investmen
t at 20%
return
whichever
is earlier
403
(toll
started
from date
24-10-
2000)
Sr. Case Approx. Agreed Type Occurre M ajor Issues in Planning M ajor Issues in Managing
No. Study Project Concessio of nee of Project Project
in Date of Time
Tolling) up to
starting
of
tolling
(Yes/No)
NICE 138.00 15 years Price Cost 1. The tolling on 1. The inadequate financial
including Cap OveiTun dilapidated existing planning resulted into
i construction =Yes bridge as a part of viability concern in initial
period Time overall project is major years.
(toll Overran flaw in planning. 2. The defects in old bridge
started = No 2. The financial plan often forced to close it
404
from date was not prepared with rendering two lane service
11-11- adequate contingency. standards and hence huge
2000) congestion despite paying
tolls.
i
i
Sr. No. Case Approx. Agreed Type of Oecurrenc M ajor Issues in Planning M ajor Issues in Managing
Study Project Concessi Regulat e of Cost Project Project
Name Cost on on Period ion Overrun
completion Duration and Time
(Rs. in (Actual Overrun
crore) Date of up to
Starting starting of
; Tolling) toiling
(Yes/No)
NICE 3. Availability of alternative

3. A maj or deviation from Golden bridge affected
other toll projects in terms profitability especially
of missing potential for during congestion.
heavy toll by creating Alternative routes
category of MAV was the generated by local
405
flaw without remedies. intersections compelled
NICE to employ more staff
to stop pilferage in the
tolled facility.
4. Undue delay in approvals
like fee revision and Force
Majeure events affected
revenue streams and
profitability.
The case studies are indicating occurrence of Ramp Up period for toll projects
before stabilization of positive net flow. The bidders and planners both are
aware of such initial problem but due to very nature of concession design, this
aspect is ignored. During this period, concessionaire faces hardship to the
extent he often turns up defaulter in debt servicing. The planners shall worry
about maintenance capability of concessionaire under such period. A properly
worked out financial base case by planners and bidders shall resolve this
problem using proper project financing. The planners shall have full estimates
of Ramp Up stage and shall incorporate project specific stipulations on
financing structure of project during this period. To facilitate project financing
of PPP, some supportive measures/guarantees shall be incorporated for
ensuring smooth passage of this difficult initial toll period.
The BOT projects are only a decade old concept in India which cover many
aspects beyond traditional cash contract projects. However, designing of
concession agreements have been on line of construction agreements only.
Except recent provision for partial traffic guarantee in MCA, the very
important aspect of traffic is most neglected by planners so far. Hence, neither
reliable past records are committed by Government or future traffic is
forecasted by Government as a commitment. Despite roads being public asset
and traffic being outcome of economic policies of Government, Government
asks bidder of BOT project to ascertain present and future traffic. All the four
case studies suggest that traffic after the starting of toll operations hold the key
for success of BOT projects. Since remaining aspects being mainly related to
construction, the concessionaire being mostly construction firm, other aspects
are generally not influencing outcome of BOT projects.
award stage.
406
4. The claims arisen due to issue of local traffic emphasized requirement of
accounting and monitoring of actual project cost and actual toll revenues
though it was a price capped BOT project. Even recent MCA has not given
importance to these issues with an understanding that it is all related to
profitability of concessionaire and hence is not of public concern. These
viability concern under Rate of Return regulation which are in fact concession
agreements with multiple securities to investors. Both the cases are having
little variation over typical Rate of Return regulation as here tolls can not be
hiked to match the agreed returns. Here, the returns are secured and deficit in
returns are added in to outstanding project cost rendering these projects to last
for many years beyond their stipulated concession period. Hence, the comer
stones for these cases are identified as- Projects Cost; Traffic Volume and
Tolling Terms. Hence in such projects all three aspects are monitored
seriously with the help of independent consultants.
6. The most striking planning issue in formulating these two projects is
avoidance of open competition for the field. Since in road sector competition
in the field is not advisable, efficient concession can be awarded only through
competition for the field. In both cases, it is unsolicited proposals being
awarded the field and two diverging representatives of public (i.e.
. Government) and private concern (i.e. IL&FS) are made partner of
commercial interest in project. This is most debatable partnership where
private concern is most likely to overshadow the public concern in terms of
increasing toll rates beyond inflationary limits and no user’s recourse in case
of reduced service standards. On other hand, IL&FS played multiple roles of-
407
Sponsor, Concessionaire, and to certain extent lenders. The worries of
Demsetz in regulating public utilities are relevant in these cases where
Alfred Marshall’s proposal to focus prices and service standards is ignored
for avoiding public investment.
from doldrums conditions.. However, Government could not extract any
9. In both cases, users were charged excessive tolls by annual increments
(beyond inflation based formulae provided in agreement) just to reduce the
deficit in return. The benefits to users were however never compared with tolls
being levied during operation period.
10. Due to assured returns, Government carried most of the risk in both the
cases. Both the cases in fact carried explicit Government guarantee for debts
raised and hence basically all funds were attracted on Sovereign eligibility
and essence of PPP was not served. Though both cases started with modest
30% of equity, the operating losses forced the owners to infuse more equity
within operation of around five years to the tune of 50% or more and thus it
was failure of financial plan to model a replicable PPP project on pioneer
basis.
11. As far as NOIDA toll bridge is concerned, the concession agreement provided
project support from commercial use of project land (BOOT agreement). But
the concessionaire company preferred to speculate by holding the prime land
and the viability concern was passed on to the users in terms of toll increase
and compounding deficit with outstanding project cost.
12. As far as Vadodara- Halol project is concerned, the agreement has provided
only four lane facility whereas the stretch is functioning as a interstate
highway between Vadodara- Delhi, Vadodara- Indore mid Vadodara-
Banswada. Hence, the future problem with this limited capacity of project
road is going to hamper project economics. This fact is well understood in
408
framing MCA where concession automatically terminates on attaining design
capacity of traffic and there as inbuilt capacity augmentation provision,
in public interest and hence both the agreements should be terminated
the chance of rewarding the concession for both the cases when these projects
underwent financial restructuring. Academic exercise of estimating NPV of
future cash flow suggests that it is possible to terminate both the project
agreements and pay back concessionaire from proceeds of awarding
regulation. The academic exercise presented in both the cases are flexible to
attain required benefits by adjusting concession period and this suggestion is
felt practical since both the cases have already gone through Ramp Up period
and operate under stable cash flow.
14. The case study of Narmada Bridge is NH project with Price Cap regulation.
This project also reveals occurrence of Ramp Up period during initial years of
operation. It is a case of proven traffic eligible for four lanning even then
traffic was found short falling to concessionaire’s estimates. Thus due to
overestimation of traffic and huge debt servicing cost as compared to toll
income, occurrence of Ramp Up period seems generic for toll projects.
reserve for maintenance or designing any evaluating of project specific
financial base case is suggested to mitigate the viability problem. The
409
15. The salient feature of Narmada bridge case study is issue of tolling the
existing bridge under the concession awarded for construction of adjoining
16. Another feature of Narmada case study that need renegotiation or re-awarding
is, non availability of category of Multi-axle vehicles and tolling of them at the
rate of six wheel trucks. NICE has claimed that introduction of ten wheel
trucks and multi-axle vehicles have reduced the total population of vehicles
under the category of trucks. The issue is pending with Steering Group but
such issues are most relevant when technology changes fast and nomenclature
used in agreement affects the viability of project. The problem with Price Cap
based concession agreement used for NICE or even MCA is ignorance of
financial aspects of project. It affects the viability of project when
renegotiation becomes impossible in want of agreeable past financial data that
is never monitored by Government. All such operational and management
problems hints at constitution of flexible agreement that is only possible if
returns demanded in the bid at award stage are evaluated at bidding stage and
are monitored during operations which are missing for Price Cap regulation
cases.
each year, shortage of coins for collecting odd figure fess, toll evasion due to
43.0
18. The concessionaire (NICE) has also restructured the loans to overcome
problems with Ramp Up period. NICE has started with 45% of equity and
then offloaded some of them by inviting other financial institution. Hence on
own capacity, it has managed financial aspect during Ramp Up period without
Sovereign guarantees, NICE could not raise toll rates as per agreement but
managed to survive with out passing cost to the users unlike IL&FS cases.
19. The relevance of Steering Group in resolving claims of NICE is felt
discouraging as the revenue loss due to riots in 2002 is yet to be attended by
them.
concession.
21. Generalizing from above points, policy level conclusions are derived here
under in subsequent discussions. The MOSRT&H practices Price Cap
regulation in designing concession agreement which ignores evaluation and
monitoring of project cost at the time of bidding and during operation stage.
Similarly, it ignores assessing and monitoring of project revenues. Despite
knowing the fact that traffic volume at the bidding stage is very important
parameter for taking up PPP project, no reliable traffic statistics on the
proposed location of toll booth are prepared. For future traffic also, State
authorities are not confident for suggesting growth rate but expect the private
investor to study the existing traffic and estimate future flow of traffic carrying
full risk. This is leading to speculation type of concession agreement and
hence it is away from bankable project design. The Price Cap regulation also
restricts concession period at bidding stage and hence viability of project is a
major concern for such projects. The latest MCA (2006) incorporates partial
traffic guarantee but it is of very limited use. On the other hand, Rate of
Return regulation has most significant feature of assured net returns
411
irrespective of traffic volume and this raises debate for appropriate regulation
for a PPP project. The precision in project cost derivation and monitoring of
actual project revenues are attractive features of such projects, making them
bankable which are deserving place in Price Cap based concession agreement.
But existence of no competitive bidding at inception and no subsequent re
auctioning renders Rate of Return based agreements too safe for investors and
loses essence of private sector participation. Within both regulation of
concession design, Rate of Return based regulation is felt more suitable to toll
this public goods but under healthy competition at bidding stage subject to
periodical review of project returns. A re-auctioning of such projects is
suggested with an aim to reduce toll levels so that new entrant in concession
will bid for rebate on existing toll level and will also pay back present
concessionaire for his remaining expected returns. Otherwise, essence of
financial monitoring embedded in Rate of Return based concession agreement
need due place in prevailing MCA of NH segment. But in any case, User’s
recourse is required to be established and hence, Price Cap based agreements
also need to be re-auctioned to incorporate concern raised by Alfred Marshall
through Demsetz auctioning.
22. As discussed above, re-auctioning of NH projects on Price Cap regulation is
also suggested that will make concession design bankable too. Hence,
acknowledgement of project cost and monitoring of revenues will be required
to be attended on lines of Rate of Return regulation. The re-auctioning of both
types of regulation based agreements will require allowing longer concession
period as matching with efficient life of civil works of the project. The
suggestion of re-auctioning will be helpful in designing flexible concession
agreement to incorporate changing needs of the traffic that will in turn help in
safeguarding investor’s viability concern and will ensure User’s recourse at
the top.
23. A larger role of some financial institution (like IDFC) is expected to finance
and refinance PPP projects on broad scale which will require concession
agreements to be different than present focus on civil works. Accepting greater
role of financial management of toll cashflow, the agreements shall be more
like bankable document atleast after Ramp Up period.
24. Most important lacuna in both the regulations is apathy to User’s recourse.
412
The concession agreements in these case studies and MCA (2006) do not
assure benefits to users for use of tolled facility in proportion to tolls being
collected. The re-auctioning process as suggested above and proactive tolling
matching with service standards can be helpful in establishing User’s recourse
in PPP project.
End Notes:
1. These divisions are adopted from subsection 4.9 -Chapter -IV of this study
and are based on MCA 2006.
2. As per standards, a four lane bridge can carry maximum 1, 20,000 PCU
including to and fro direction traffic.
3. There is no model concession agreement on Rate of Return regulation based
projects.
4. The CA allows 20% yearly return on total investments. So, debt and equity
both earn at 20%.If 100% funds borrowed at 20% then no extra returns. If
cost of borrowing is 14.7 % and 70% is debt, return on total funds=
0.70(1.20+1.053)+ 0.3(1.20) =1.2371 or 23.71% as compared to 0.70(1.2)
+0.30(1.20)=1.20 or 20% .The CA allows compounding of this 20% of return
on outstanding investments if it is not met with from net revenues of
operations(i.e. revenues minus operation and maintenance cost). Once the net
revenues are built up to reduce the outstanding project cost, the hope for end
of concession agreement begins. When outstanding project cost is diminished
to zero from net revenue of that year, the concession period ends.
5. The VHTRL had stated landed project cost of Rs. 170.94 crores at start up of
operations. The 20% return for a year will be about Rs. 34 crores. Since,
VHTRL has not made any further investment in the project, the landed project
cost of Rs. 170.94 crores shall be added on by post tax returns annual return at
20% if not received during yearly operations. The toll rebates given by GOG
at inception were supposed to be added up in project cost and this is also not
known for this study and has been derived from calculations. For VHTRL,
there was no return for FY 2000, 2001, 2002 & 2003, So, compounding
assured return of 20% over project cost of Rs. 170.94 crores will mean
413
accumulation of Rs. 295.38 crores as a project cost by Sept 2003. Thus it
required to pay to VHTRL Rs. 124.44 (=295.38- 170.94) crores as a shortfall
over startup project cost. Since GOG has actually paid Rs. 135.91 crore for
shortfall (i.e. aggregate project cost shall be Rs. 322.61 crore), the project cost
remaining to be recovered through GTRIL can be stated to stand after paying
shortfall at Rs. 186.00 crores on 30th September 2003 on proportionate basis.
Such calculations are worked out for academic exercise in want of actual data
from this concessionaire.
414
REFERENCES
Buxbaum, Jeffrey N. and Ortiz, Iris N. (2007): Protecting the Public Interest: The
Role of Long-Term Concession Agreements for Providing Transportation
Infrastructure: Research Paper No.07-02 (June) USC Keston Institute for Public
Finance and Infrastructure Policy (www.usc.edu/schools/sppd/keston/pdf/20070618-trans-
concession-agreements.pdf last accessed on date 12-5-08)
Chandra, Prasanna (2004): Financial Management -Theory & Practice CFM-

McGraw Hill Professional Series in Finance, Seventh Edition
Cherian, George et al.(2007): Global Toll Road Rating Guidelines Fitch Ratings
Criteria Report on Global Infrastructure and Project Finance
(www.ibtta.org/files/PDFs/07%20Fitch%20Toll%20Road%20Rating%20Guidelines.pdf last accessed
on date 12-5-08
Economic Survey of India:1998-99: Ministry of Finance, Government of India

Eduardo Engel, Ronald Fischer and Alexander Galetovic ( 2005): Privatizing

Highways In The United States Work in Progress For World Bank (last accessed
through econpapers.repec.org/paper/edjceauch/209.htm on 25-4-07)
IDFC Red Herring Prospectus issued on June 25th 2005 For Public Issue of
403,600,000 equity shares of Rs. 10 each for cash (www.sebi.gov.in/dp/idfcfinal.pdf
last accessed on 12-03-08)
IL&FS (2002): Presentation To The PPP Workshop-Delhi-NOIDA Bridge Project

accessed from IL&FS during training to GOG officers
(www.worldbank.org/html/fj3d/transport/training/ppp_workshop/puri.ppt last accessed on
date 12-5-08)
Kerf, Michel with Gray, R. David; Irwin, Timothy; Celine; Levesque, Robert and
Taylor, R. (1998): Concessions for Infrastructure A Guide to Their Design and
Award :World Bank Technical paper no. 399 Finance, Private Sector, and
Infrastructure Network, World Bank Publications (available at
http://www.worldbank.org accessed on net dated 25-4-07)
Mayer, Jennifer (2007): TRB Summer Meeting at Chicago (July 2007) Presentation
from FHWA US Government (accessed www.fhwa.dot.gov/ppp on date 25-12-07)
Monnier, Laurence et al. (2003): PPP-PFI : UK Market Trends and Fitch Rating
Criteria for European PPP Transaction Fitch Ratings Criteria Report on Project
415
Finance (www.developmentfunds.org/pubs/Fitch%20PPP-UK.pdf last accessed on date
12-04-08)
NTBCL (2005): Draft Letter of Offer for Issue of Rights Equity Shares Oct-2005
accessed on www.dndflyway.com on date 25-10-2007
NTBCL Admission Report (2006): Admission of GDRs to trading on AIM accessed

on www.dndflyway.com on date 25-10-2007
NTBCL 2006: International Financial Reporting Standards (IFRS) September 2006

Ending accessed on www.dndflyway.com on date 25-10-2007
NTBCL Traffic Study 2006: DND Flyway Traffic Forecast Validation and
Revenue Forecasts Study accessed on www.dndflyway.com on date 25-10-2007
Pandey, I.M. (1995) : Financial Management Seventh revised edition, New Delhi
Pargal, Sheoli (2007): Concession for the Delhi NOIDA Bridge Secretariat for the
Committee on Infrastructure, Planning Commission, GOI
(infrastructure.gov.in/pdfTNOIDA.pdf accessed on date 12-3-08)
Queiroz, Cessar (2005): World Bank Tool kit for PPP in Highways World Bank
Presentation (Feb) (http://www.worldbank.org accessed on net dated 25-4-07)
Streeter, William et al.(2004): Public-Private Partnership: the Next Generation of

Infrastructure Finance Fitch Ratings Special Report on Project Finance
VHTRL (1996): Feasibility Study Report by Kirloskar Consultants, India availed

from office of Vadodara-Halol Toll Road Company at Vadodara
World Bank (1996) : India Private Infrastructure Finance (IL&FS) Project: Staff
Appraisal Report No. 15364-IN (March) World Bank Publications
WSA Engineers India (2003): Traffic Revalidation Study for Delhi NOIDA Direct
Flyway accessed from WSA consulting offices.
Yescombe, E.R. (2002): Principle of Project Finance Academic Press US

Publications.
416
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vx
ROAD PRICING AND WILLINGNESS TO PAY TOLLS
6.1 INTRODUCTION
SECTION-I: THEORETICAL BACKGROUND
6.2 THEORETICAL ASPECTS OF ROAD PRICING AND WILLINGNESS

TO PAY
6.2.1 Are Roads Public Goods?
6.2.2. Travel Demand And Application of Tolls
6.2.3. Marginal Social Pricing And Average Pricing Of Roads
6.3 ISSUES OF SECTORAL TAXES ON INDIAN ROAD SECTOR
6.4 TOLLING LEGISLATION IN INDIA
6.5 BOT PROJECTS AND APPLICATION OF TOLLS
SECTION-n: EMPIRICAL ANALYSIS
6.6 FIELD SURVEY FOR IDENTIFYING ISSUES RELATED TO WTP OF

ROAD USERS
6.6.1 Availability of Standards And Recent Trends To Carry Out WTP

Survey:
6.6.2 Structuring WTP Questionnaire For Car Users And Truckers On

Vadodara - Halol Toll Road
6.6.3 Sampling Method For Car Users And Truckers For WTP Survey
6.6.4. WTP Results For car Users and Truckers
6.6.5 Model Building Process Of WTP For Toll Road
417
6.6.6 Regression Analysis For Explanation Of WTP For Car Users
6.6.7 Regression Analysis For Explanation Of WTP For Truckers
6.7 CONCLUSION
418
CHAPTER-VI
ROAD PRICING AND WILLINGNESS TO PAY TOLLS

6.1 INTRODUCTION:
As seen in earlier chapter, the success of commercial approach to development of

roads is ultimately linked to the public response to direct tolling operations. Under
direct tolling, the third dimension of PPP agreement i.e. public itself is asked to pay
for Government’s decision to develop the roads on tolling basis. But tolling has many
implications and externalities which are assumed beyond the scope in a typical
concession agreement. If a bidder fails to understand tolling implications at given
locations, he faces many hurdles (mainly from local users) as seen in some of the case
studies. Tolling of a segment in a transport network creates “Rat Running” behaviour
on long distance users. It is necessary to understand what are aspirations of road users
and issues emerging out need due attention. Hence in this chapter, road users are
directly interacted for realizing their perception of such a complicated operation of a
toll project through concession agreement wherein user’s recourse is never addressed.
The whole chapter is divided into two sections: Section-I (Theoretical Background);
Section-II (Empirical Analysis) and is presented below.
SECTION-!: THEORETICAL BACKGROUND
6.2 THEORETICAL ASPECTS OF ROAD PRICING AND WILLINGNESS

TO PAY:
The road pricing has old history as was observed under Chapter-II for literature
review. Historically, roads were never public goods considering the road
developments on toll basis by Trust/Corporation in UK/US during 17th and 1S‘q
centuries (Benson & Moore 2002). The tolling has been implemented either as
funding tolls (earlier turnpikes in UK/US and now in form of BOT/BOOT
agreements) or a decongestion tolls. The first category of tolling is based on equity in
pricing the road usage whereas latter is related with efficiency aspects of road usage.
The arena of road pricing should have been explored by economists for efficiency and
equity in the society. But it has been observed that there is some chaos in framing
road pricing. The economists do agree to solve highway congestion by road pricing
419
but beyond this primary insight, there is much disagreement over setting of tolls
(marginal versus average costs), how to cover common costs (choice of imposing
various fixed charges on ownership of vehicles), what to do with excess revenue
(shall the tolls neutralize existing taxation in the sector?) etc (Lindsey 2004). The road
development carrying significant externalities, roads have been covered under domain
of Government provisions. Hence, present society perceives road as a Public Good
but now the concession agreements are allowing tolling on individual road user for
funding or efficiency objectives and that sparks row in terms of toll resistance. The
resource crunch expressed by Government is yet to make impact on road users’
aspirations for free utilization of this commodity. The willingness to pay (WTP)
among the users is not so elaborate for public nature of this commodity. The
commercial investors under BOT agreement are at the stake under such circumstances
when there is no established tolling culture among the users of facility.
6.2.1 Are Roads Public Goods?
The very public nature of roads and mostly free provision of this infrastructure has
lots of implications when a toll road project is implemented and viability of project is
pinned to toll revenues of the project. The commercial calculations of project
feasibility often overlook willingness to pay aspects of road users and hence merely
by coercion, the toll projects are awarded monopolistic conditions to operate where
demand and supply equilibrium seldom matters (imperfect market).
The various pedagogical texts recognize four kinds of goods in the economics:
A) Private Goods: Excludable and Rival e.g. congested toll roads.

B) Public Goods: Neither Excludable nor Rival e.g. uncongested nontoll roads.
C) Common Resources: Are Rival but not excludable e.g. congested nontoll
roads.
D) Natural Monopolies: Are Excludable but not Rival e.g. uncongested toll
roads.
Hence the status of roads shall be depending on institutional arrangements provided

by policy makers. A toll road may behave like a private good or natural monopoly
good whereas a free road may lose the acceptance if it is congested and it turns up to
420
be matter of common resources. In general, public nature of roads (by continued
building up of free roads using general tax revenues) and already travel based taxation
faced by road users generate a gamut of issues regarding direct pricing of the roads. In
fact the concept of “Public Goods” is felt confusing within three analytically distinct
characters: Excludability; Rivalry and Public Finance, nevertheless the user’s
perception of roads as public goods helps in understanding problems of pubic decision
makers. The recent trend of pricing of the publicly and privately funded roads is yet
not met with consensus even among economists world over (Lindsey 2006). The
diminishing spending capacity of Governments is spearheading for attracting private
sector participation in this sector. When a good does not have a price attached to it,
market forces can not ensure such good is produced and consumed in proper amounts
and at proper time and hence policy makers are gradually communicating between
commercial and public interest for sustainable PSP in this sector.
6.2.2 Travel Demand And Application Of Tolls:
The demand for travel for a human being is the results of need to engage in certain
activities e.g. work (Business), Shopping, Leisure, School, social etc. The travel
demand being thus a derived demand, it usually does not have any value or utility by
itself. Hence traveling itself can not be increased or decreased using incentives or
disincentives Moreover, it is more guided by spatial allocation of various activities of
a traveller at a given point of time. A road user if travels frequently (repetitious
choices) an individual is unlikely to make a rational decision each time. In such case,
habitual behaviour or inertia may prevail over rationality and utility maximization
may be sidelined. Similarly it is quite possible that an individual hardly travelling may
not be aware of attributes for utility maximization and thus may not be rational while
incurring travelling cost (Emmerink 1998). So demand for travelling and thus cost of
travelling may be severely affected by individual’s behavioural response which may
be even changing time to time. Under such complex conditions, imposing road user
charges or toll on an individual can generate varied responses and imposition of such
charges may alter their activity pattern and hence the travelling decision. The concept
of road pricing is in practice since long in many countries and more advanced concept
of congestion pricing is being implemented to recover marginal social cost incurred
by one user on others. The concept of consumer surplus due to improved road
421
conditions is often discussed by the transport economists (Heggie 1972 and Glaister
1981). The direct benefits like reduction in vehicle operating cost ( VOC), comfort,
convenience and saving in travel time, reduction in accident costs, environmental
improvements and indirect benefits like increase in land cost ( mostly applicable in
urban zones), multiplier and accelerator effects etc. contribute to the consumer
surplus of a road user. Hence for a given demand function of a road user, reduction in
expenditure to maintain constant level of utility in case of change in travel cost
explains the consumer surplus. This consumer surplus is giving measure of
willingness to pay under improved road conditions. It is very important to note that
consumer surplus forms the basis of willingness to pay and WTP forms the basis of
fixation of toll levels. The toll levels in conjunction with year wise traffic projections
form the foundation of viability of any BOT project (Figure:VI-l).
Figure: VI-1
Conceptual Relation of WTP with Viability of BOT Project
(Derivedfrom conceptual understanding)
6.2.3. Marginal Social Pricing and Average Pricing Of Roads:
Theoretically, every individual vehicle (assuming all are identical) will incur some
mechanical and time related cost per Km. of road use. But both these costs per km.
will be function of No. of vehicles plying on the road (or congestion on that Km. of
road). Suppose that private cost is represented by C (x). Every individual thinks that
422
he is incurring only cost C (x) under the presence of x-vehicles in the traffic flow but
what cost he makes on others is never accounted by him. This marginal cost is
marginal social cost effected by an individual. Now for each vehicle marginal private
cost will remain less than the marginal social cost so it forms a basis for introducing
toll on marginal vehicle. Hence, it is optimum to toll such that marginal private cost
plus toll equals the marginal social cost. It means one shall be tolled for the cost he
imposes on others by his marginal effect. Hence it is possible to argue that on
uncongested road / bridge where no congestion occurs due to marginal vehicle, no toll
is admissible. This is true for economic analysis (Glaister 1981) and hence the
evaluation may suggest taking up such projects from public investments, or the loss to
a private toll operator may be compensated from public purses due to exempted
tolling. The economic analysis available in various literatures (Emmerink 1998,
Heggie 1972 and Glaister 1981) is explaining how to internalize the social cost of
marginal vehicle on the basis of economic efficiency taking recourse of tolling. This
concept will require tolling to vary with level of congestion. Hence in case of no
congestion, direct tolling may not be the suitable tool to charge the users. The above
stated theoretical explanation for tolling can be useful in case of BOT projects being
tolled to recover the investments done by the concessionaire on the assumption that
such projects are taken up on congested corridors. However, the tolling on BOT
projects is applying uniform tolling but rates are classified as per size of vehicles.
This is called Average Cost (AC) pricing and is targeted to recover the investments
rather than worrying for efficient use of road space.
The ideological difference among economists is regarding application of Short Run

Marginal Cost (SRMC) based pricing for efficient road use versus average cost (AC)
pricing for cost recovery. The idea of average cost pricing was disliked by many for
over investments and SRMC was found too theoretical. Of course, SRMC based
pricing may require host of factors like, demand elasticity, externalities etc. and hence
may require sophisticated technology to inform and apply toll variations in smooth
manners. This is now getting possible using cameras and satellite based global
positioning systems and already in use in UK, US, Hong Kong, Australia etc. known
as electronic pricing. In the Indian context, concessions are granted on average cost
basis for new constructions and maintenance agreements. But capacity augmentation
in terms of four lanning and six lanning are so much delayed that rationing and
423
efficiency factors for decongestion are automatically addressed in many cases where
alternatives are available. Whether it is SRMC or AC based pricing is adopted for
BOT roads, the Public concern is use of monopoly power being granted to private
firm especially when concession agreements are not providing any user’s recourse.
6.3 ISSUES OF SECTORAL TAXES ON INDIAN ROAD SECTOR:
In India the road sector is already heavily taxed by Central and State Governments as
detailed below. The incidence of taxation on road sector has been so far labeled as
general revenue except recently created dedicated fuel cess by Central for NHAI and
by few State Governments. The myriad taxes imposed on road users are listed in
Table: VI-I:A and values for FY 2002 are given under Table: VI-1:B which are
illustrative of weightages of various taxes. As given in these tables, State and Central
i.e. both Governments are almost drawing equally from this sector totaling to the tune
of Rs. 500.1 billion per year. In this, cars are found contributing totally Rs.115.8
billions which is closely followed by trucks and buses. Considering occupancy ratio
or carrying capacity of trucks and buses, cars are leading in paying for roads at much
higher proportion than given under Table: VI-1:B. The fuel based charges are
collected on per km usage and hence are very much relevant to toll projects.
424
Table: VI-1:A
Range Of Taxes on Road Sector
Central Government State Governments
Vehicle - Central customs/Excise duty on - Sales tax on
Purchase motor vehicles vehicle/chassis and cab/
- Central sales tax on inter-state body
transactions and shipment of
vehicles
Vehicle - Motor vehicle tax
Owner (annual or lifetime)
ship - Registration fee
- Certificate of fitness
—
- Taxes levied on
passengers and goods
vehicles
- Entry taxi
Vehicle - Excise duty on fuel - Sales tax on spares/
Use - Cess on fuel lubes/ accessories
- Excise duty on - Sales tax on fuel
spares/lubes/accessories - Cess on fuel
- Road user tolls - Road user tolls
- Permits and licenses
- Fines and penalties
1= Applicable to vehicles purchased / registered in one state and brought into another
state
(Source: India Financing Highways: World Bank Report 2004)
A striking revelation is, fuels are contributing 53% of the total sectoral revenues of
Rs. 500.1 billion. The World Bank has assessed that total tolls collected on Indian
roads amounts to Rs. 1500 crores during the FY 2002 which is merely 3% of total'
sectoral revenues of Rs. 500.1 billion. Hence, it seems logical to charge a bit more on
fuels and get rid of tolling modalities. But it is required to be noted that existing
tolling of Rs. 1500 crores is not applicable to all vehicles attributing Rs. 500.1 billion
of revenues. The city buses for example are not exposed to tolling on highways. By
adding toll requirements to fuel taxes, all vehicles are paying for every development
in roads irrespective of individual utility. Thus, an interstate long distance trucker will
be unduly subsidized at the cost of urban or local journey making vehicle. The equity
(geographical equity) concern will not allow planners to do so. More over, changing
perspectives of fuel type and efficiency will distort the actual levy of fuel taxes across
various vehicles and this will not really help in rationing or efficient use of limited
road space.
425
Table: VI-1:B
Total Taxes On Vehicle Type (Assessed for FY2002, Rs. in billion)
Total 2 Car Jeep/ Bus Freight vehicles
Wheeler Taxi LCV | HCV MAY
Central Government
Excise on Fuels 150.9 32.8 52.2 4.4 10.1 15.8 34.3 1.3
Excise on motor 31.7 6.6 15.0 5.0 1.1 1.5 2.3 0.1
vehicles
Excise on tyres 11.2 1.5 1.6 0.4 1.0 1.8 4.2 0.2
Excise on motor 15.3 1.4 2.5 0.9 1.8 2.7 5.8 0.2
parts
Cess on fuel 28.1 2.8 4.4 1.4 3.2 5.0 10.9 0.4
Total* Central Govt. 237.3 45.1 75.6 12.3 17.5 26.8 57.5 2.3
State Governments
Sales Tax on Fuels 87.9 9.4 15.0 4.2 9.7 15.2 33.0 1.3
Sales Tax on motor 39.0 11.2 14.5 4.8 1.9 2.5 4.0 0.2
vehicles
Sales Tax on tyres 6.2 0.4 0.3 0.0 1.5 0.6 3.2 0.1
Sales Tax on motor 4.9 2.3 0.9 0.1 0.5 0.3 0.8 0.0
parts
Taxes on vehicles** 124.8 7.4 9.4 2.8 81.9 5.2 16.7 1.3
Total State Govt. 262.8 30.7 40.2 11.9 95.5 23.8 57.8 2.9
Grand Revenues 500.1 75.8 115.8 24.2 113.1 50.6 115.3 5.2
* not including customs duties which are payable on import/export, a further Rs77 billion in
2001-02
* including fees, fines, penalties, passenger and goods taxes
(Source: India Financing Highways : World Bank Report 2004)
It is also to be noted that out of the total sectoral revenues of Rs. 500.1 billion, 50% is
collected from users of NH and or SH whereas urban road users are contributing 34%
of sectoral revenues (India Financing Highways : World Bank Report 2004). Hence,
direct tolling of main links of Indian road network i.e. NH and SH raises large
repercussion when road users are tolled on road use in addition to other taxes. Also,
taxes on purchase/ownership of vehicles are covering about 40% of the sectoral
revenues. So in absence of tolls, fixed cost of running a vehicle is high enough to use
the vehicles extensively. This fact is good enough to explain the commercial road
users e.g. truck owners/operators to reduce the travel time for enabling more no. of
journeys during efficient life cycle of say 15 years. This feet shall mean higher value
of time saved if the fixed cost of vehicle ownership is taken in to account. A
generalized data on actual revenue collected per vehicle km basis for various vehicles
426
is given in Table: VI-2 with some assumptions for efficient life of vehicles. Using the
same data, per passenger per km taxes are calculated and it shows the car owners
seem punished for perceived luxury of the commodity.
Table: VI-2
Realization of Per Vehicle Taxes on Road Sector (Rs.)
2 Car Jeep/ Bus Freight vehicles
Wheelers Taxi LCV HCV MAV
On 680 8087 9087 8863 4428 7488 10818
Purchase
On 266 2487 2487 210340 5515 17628 33663
Ownership
Road 1778 19947 10026 71228 43460 96499 91071
use(other
than direct
tolls)
Total 2724 30521 21600 290431 53403 121615 135551
annual tax
per
vehicle
Total tax 0.44 2.39 1.03 5.69 1.48 2.03 2.51
per (=0.22 (=0.60 (=0.17 (=0.14
vehicle- per per per per
km passenger passenger passenger passenger
km) km) km) km)
(Source: Derived From India Financing Highways : World Bank Report 2004)
But economists are not ready to spare truckers considering that they are only paying
80% of costs imposed by them by damaging the road pavements due to heavy loads
(India Financing Highways : World Bank Report 2004). In addition, tracks are found
to impose substantial delays on other road users through their slow speeds, even on
the highway network. Hence researchers often suggest the policy makers to charge the
fuel for them (i.e. diesel) on higher side and to impose higher taxes/ tolls to pay for
their share of investment needs in road sector. The problems of these long distance
travellers are aggravated further due to the fact that interstate SH and NH are under
maintained in India. As per data under Table:VI-3 for FY 2002 the extent of actual
maintenance is only 22% for NH and 40% for SH of the normative requirements.
42?
This deficit is attributed to lower returning back of revenue collected from road
sector, back to this sector.
Table: VI-3
Total Revenues and Expenditure Mismatches (FY 2002)
(Rs. in billion)
Tax / charge Road Expenditure % o f
revenue Expenditure Revenue
National and State 254 63 25%

Highways
District and Rural 77 64 83%
Roads
Urban Roads 169
Total 500 211 42%
(Source: India Financing Highways: World Bank Report 2004)
6.4 Tolling Legislation in India:
As evident from previous subsection, direct tolling has very small contribution to
overall sectoral revenues. But due to inefficiency in collecting the revenues and
spending the allocations on Government side has provided platform for private sector
to spend and earn himself in terms of tolls under PPP projects. There are basically
three Acts that empower either State or Union Government to impose user fee/ tolls
for use of highways.
They are:
1. The Tolls Act of 1851.

2. The National highways Act 1956
3. The National Highways Authority of India Act 1988.
The Tolls Act 1851 authorizes State Governments to levy toll on users of any roads or
bridges (excluding NH) and State can lease the collection rights of tolling. The NH
Act 1956 is related to tolling on NH and declaring any road as NH. The NH Authority
Act allows a highway authority to assume obligations of NH and collect tolls on
behalf of Central Government.
428
Since very few states have enforced toll policies on SH, the State highways are many
of times found as free roads. But The NH Act 1956 originally provided for fees for
services or benefits on use of ferries, temporary bridges and tunnels on NH (Section 7
of NH Act 1956, GOI). The NH rales framed under the Act in 1964 also provided to
lease out collection of fees on yearly basis. These fees were mainly for Dolly/ Palki
hauling or non mechanical carriage pulling charges. However, it also mentioned fees
for car at Rs. 10.0 plus Rs. 0.25 per occupant and Rs. 50.0 per loaded track/
passenger bus which were quite high for 1964 period. The rules also mentioned fees
of Rs. 0.06 per dog and such fees for other animals which is beyond imagination in
present context.
The NH Act 1956 was amended in 1977 to include all permanent bridges constructed
with cost or above Rs.25.0 lacs (built and opened to traffic after date 1-4-76) for
collection of fees on use but GOI was at discretion to omit any bridge in public
interest (Amendment to Section 7 under NH Amendment Act 1977, GOI). The
corresponding fee structure was issued in 1978 which was having fees only for
mechanical vehicles like 2 Wheelers, cars, bus/ trucks as per cost of the bridge. For
example, fee for car was Rs. 2.0 and Rs. 10.0 for bus/truck in loaded condition
(unloaded will pay Rs.5.0) on bridge costing more than Rs. 100.0 lacs. Now the fee
difference for loaded/ unloaded conditions is not allowed. Also, the rates are felt
quite high if toll rates of NICE (Rs. 14.0 for car and Rs. 42.0 for bus/ truck in 2007)
for Narmada bridge costing more than 100.0 crores are compared. The Fee Rules
1992 enhanced the fee rates for bridges constructed and opened to traffic after 1st
April May 1976 and stated to discontinue tolling after recovery of costs.
Subsequently, it is the NH (Amendment) Act 1992 that has levied fees on use of
sections of NH. The consequent fee Rules 1997 made historical amendments for
bridges and sections of NH on four lanning not only to imply new fee structure but
allowed entry of‘ANY PERSON” to collect the fees for investments of that person in
development and maintenance of NH which required amendment of Section8-A of
NH Act 1956. Originally the Act was authorizing only public bodies for development
and maintenance of NH. More over these rules imposed fees for use of facility created
by public funds in perpetuity. These Rules of 1997 provided capping rates for section
of NH roads as below which can be construed as a bench mark for private investment
429
toll road projects under BOT /BOOT. The Rules of 1997 are providing toll rates to be
linked to Whole sale price index for any subsequent year. These adjustments are not
really understandable remembering that any road project will be completed by upfront
payments and hence passing over the inflation to users is like further spiraling up the
effect of inflation for users. Knowing the fact that BOT projects are evaluated and
awarded based on applying some discount factors to the future cash flows, the tolls
adjusted for inflation are actually like real hike in toll levels. And the toll tenure in
perpetuity is not at all linked to service standards in case of publicly funded projects.
For BOT projects, after end of concessions the project is handed over to public
authority and then onwards, indiscriminately above toll rates are levied to the users as
if the investment is yet to be recovered. Hence, by virtue of these Rules, tolling on
NH has become pervasive and it has gathered resistance from users like any country
in the world. The above Rules from beginning are framed to recover the costs but
keeping in view savings in vehicle operating costs and liability for facility
maintenance costs. The foundation of tolling the road sections is thus based on cost
recovery and not for congestion or efficiency of road space or road network. More
over, the introduction of tolling on four lanned road sections can be interpreted like
creating “exclusion” and hence converting a pubic nature of roads in to a natural
monopoly spurring lot of reaction. Once the tolled road starts getting congested and
even after willingness to pay the price, the users are denied access or pricing is
exercised restrictively the facility turns up to be a private good and public concern is
shown exit from the operations. In India, dynamic pricing is yet to be set up but a
facility not accommodating increased traffic even after paying tolls will be like
private good. Because in this case the traffic already entered will not be replaced by
new entrants in a flow and new entrants will feel as if the facility is a private club.
The present legislation is not providing any user’s recourse for availing stated facility
even after paying tolls. Like, people paying for four lanning bridge facility at
Narmada bridge have to queue up at bridge site for their turn to cross the river even
after paying four lane tolls when the old bridge is closed for repairs and the facility
works as a two lane facility. Neither CA nor NH Act is providing for any
refund/rebate in such cases.
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Table: VI-4
Toll Rates on NH sections on four tanning at base level and adjusted for inflation for
2006-2007
Sr. Type of Vehicle Capping rate as Adjusted toll rate as on 1-4-
No. on June 1997 2006 per km(AWPI% =
per km 100*(196.8-131.4)/131.4 =
49.8%
1 Car/jeep Rs. 0.40 per km Rs. 0.60 per km
2 LCV Rs. 0.70 per km Rs. 1.05 per km
3 Truck/ Bus Rs. 1.40 per km Rs. 2.10per km
4 Heavy Construction Rs. 3.00 per km Rs. 4.50 per km
machinery and
earthmoving equipment
(Derivedfrom GOLNHRules 1997)
6.5 BOT PROJECTS AND APPLICATION OF TOLLS:
In practice for any BOT project, the consultants try to estimate savings accruing to
users in their private costs with the help of Indian Road Congress (IRC- the apex body
in preparing standards and guidelines for highway sector) standards for road user cost
(IRC:SP-30:1993) under various levels of services and establish the viability of
tolling. The problem with users is they do not know consultant’s assumptions for
savings accruing to users and the said savings are not secured/ guaranteed for users.
Under the tolling concept on Short Run Marginal Cost (SRMC) basis, it is expected
that the user will bear the toll cost from savings in his private costs under improved
conditions. As far as facility is not crowded, the users may agree to sacrifice all of the
savings perceived for paying the tolls but as the traffic grows, it contradicts the
foundation of tolling based on VOC savings. If the tolling is based on marginal social
cost pricing and traffic intensity is heavy, the social cost to marginal vehicle will be
higher for every next vehicle. So, it is expected that user will enter the facility to the
extent he wipes out his whole savings in private costs. After this stage, a user will not
have any incentive to enter the facility. Hence any facility with excessive traffic will
operate to collect maximum toll on the name of social costs and will bring in
efficiency of usage. In case of the BOT projects, irrespective of congestion, users are
charged uniformly at all hours to wipe out most of the savings in private costs due to
improved conditions and users do not have any obvious alternative. Hence, some
times tolls are more than savings when congestion is prevailing or roads are damaged
431
especially in monsoon. So, there may be clash between interest of private investors
and public interests since the user may face congested conditions though he has paid
the toll and thus he wipes out his theoretical benefit for paying the toll and after
entering the facility he faces the congestion / poor service standards to add in to ,
private costs. The planners and bidders of BOT projects are practically not covering
such issues in taking up BOT projects.
The bidders of BOT projects mainly concentrate on traffic volume and toll levels as
per NH Fee Rules are adopted as input to financial model prepared for a BOT project.
As known from established practices, no bidder tries to check up with WTP aspects
while framing his bid. The willingness to pay is assessed by consultants before
floating the bids for BOT projects by asking the road users for their willingness to pay
for future benefits in the absence of tolling. But such contingent questions may have
following issues.
• The consultant is asking for future facility (e.g. four lanning) on a congested
substandard road and hence the WTP response may be higher to reflect present
state of grievances. Or to lessen the future liabilities, users may opt to express
lower WTP than toll levels required recovering the investments.
• The issue is, WTP is expressed on anticipation of benefits and concessionaire

faces the situation almost after three to four years of such surveys. For
example, WTP expressed for tracks and cars on Vadodara - Halol road were
Rs. 28 and Rs. 17 respectively in the WTP survey conducted by a consultant in
1996 for preparing feasibility report. This survey did not differentiate between
six wheel trucks and ten wheel tracks. Also, it did not classify trucks based on
number of axles. These 1996 survey results are supposed to hold good for toll
rates of minimum Rs. 85 per track (six wheels) and Rs. 30 per car during
2006-07. Since the feasibility report is not mentioning 10 wheel trucks, Rs.28
can be considered WTP at design stage which is now Rs. 140 during survey
period of this study. Hence, the WTP surveys conducted beforehand does not
convey meaningful information of user perspective in long terms. The
introduction of new category of tollable vehicles after feasibility report creates
issues of acceptance as compared to traditional vehicles.
432
• The tolls are justified based on positive signals from WTP surveys conducted
by consultants at project approval stage. The WTP results are used in
preparing base case for the project. The revenues are estimated for every year
(average 8%. of inflation on initial toll levels was assumed by consultants for
Vadodara- Halol road) and are discounted along with other accounts of
expenses at desired rate. It means the tolls are discounted for assumed rate by
planners and bidders (it is 20% for Vadodara- Halol road) in preparing bids.
The planners/bidders design their bids based on such base case and toll periods
are fixed. Now the user’s discount rate for paying these tolls may not be
same as planners/bidders. Alternatively, users may not value future benefits
due to improved facility while responding to WTP questions at feasibility
stage. The problem is serious when concession period is as long as thirty
years. The argument may demand review of WTP or in practical sense, actual
savings accruing to the users while revising the toll rates every year. Such
important aspect of reviewing the benefits is not embedded in any Concession
Agreement (CA) practiced so far in India. When there is imperfect market of
road services (due to no alternatives and administered/ fixed tolls), the users
may be the only losers in the PPP in want of review of actual benefits.
• In above paragraph, the inflationary increase of revenue is also discounted at

assumed rate which means inflation is treated like real increase in toll levels.
The users are not availed any increase in service standards to assimilate such
hike in price. Some times, tolls are revised as per scheduled date but
particularly in those days, service standards may be at worst level. The WTP
measure in such case may hamper sustainability for such projects.
• The consultants are not measuring any externalities due to proposed project of
highways. Hence, they are passing all cost on the users as a direct toll. But the
externalities may occur like, construction of expressway between Ahmedabad
-Vadodara will relieve the NH-8 of some pressure. Now the expressway is a
tolled facility whereas NH-8 between Ahmedabad -Vadodara is free road
except some tolls on two bridges. Here the benefit of expressway is externally
passing freely to NH-8 users at the cost of tolls paid by users on expressway.
To solve such problem, quoting Roth (1967) on external economies, Block
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(1983) discusses either to charge the beneficiaries of externalities due to a road
project or Government may invest to that extent (it can be subsidy on tolls) in
the project to remove distortion in road pricing. Block (1983) thinks that the
direct tolling for &11 cost recovery is affecting toll acceptance and it is in turn
leading to underinvestment by the private investors in such projects. This
argument alternatively hints at scope for supporting PPP projects from general
taxation to certain extent. The GOI decision to provide capital grant up to 40%
of project cost in a BOT project is a step towards such measures. This
approach will require the consultants to derive actually required percentage of
capital grant from measurement of externalities. Or the consultant may study
the proposed road project as a part of overall development of region and a
corridor development approach may serve the purpose of creating road
infrastructure spreading cost over larger mass of beneficiaries. In absence of
such analysis, it seems that consultants for the BOT projects are either leading
to excessive tolls or indefinite tenure of tolling. Also, such limited analysis by
consultants renders many projects non viable when public component of such
project is not separated from competitive bidding process. Also, the bidders
are not really able to compete on a project which has so pervasive
beneficiaries beyond ambit of tolling. Thus it suggests to define and separate
out percentage of public component from BOT project by Government itself
at planning stage ( being best party to define) to make BOT projects possible
to cover otherwise non viable with acceptable toll levels for finite time.
Thus Government has incorporated WTP surveys in assessing feasibility of road

project on PPP format which carry above said limitations and need to review WTP at
intermediate stages is felt needed for PPP projects. To assess revised WTP on an
existing toll road will require atleast continuous three days long traffic survey which
will generate lots of public pressure and it is beyond scope of this study. However, a
field survey of randomly selected cars plying on Vadodara- Halol Toll Road and
truckers concerned with this route was conducted as discussed in subsequent
subsections to understand planning and management issues related to direct tolling on
selected case study road.
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SECTION-II: EMPIRICAL ANALYSIS
6.6 FIELD SURVEY FOR IDENTIFYING ISSUES RELATED TO WTP OF

ROAD USERS:
In this study, on site WTP survey is conducted for cars and trucks as a representative
of public and goods carrier respectively. The survey is done to understand various
underlying issues of users who pay the tolls as required by NH Act 1956 (on NH) or
Tolls Act 1851 (on SH) for carrying out their journey. The survey is focused for users
of Vadodara- Halol State Highway (VHTRL case). The selection of this toll road has
no specific reason except that other aspects of this road project are covered under this
study and this SH is catering to interstate traffic like NH. Unlike bridge projects, the
users of road sections will have better alternative free (comparatively) roads to choose
from. The field surveys on NH could have been difficult to conduct looking to the
exorbitant volume of traffic beyond 60,000 PCU per day. Practically the surveys for
cars were done on toll road itself. The law and order conditions were handled with the
kind help of VHTRL personnel. For trucks, looking to the limited decision making
capacity of truck drivers in choosing toll roads versus free roads and communication
problems with truck drivers, it was preferred to make dialogue in the offices of track
owners/operators (which are located near Golden Chokdi near entrance point of
Vadodara- Halol Toll Road) in presence of track drivers.
6.6.1 Availability of Standards And Recent Trends To Carry Out WTP Survey:
No elaborate case studies explaining willingness to pay for a toll road project are
available in academics and also no guidelines as such are available from the
Government / IRC for conducting WTP study especially on existing toll roads. The
MOSRT&H uses guidelines published by Indian Road congress for project
formulation and approval including BOT Projects, viz. “ Manual for Survey,
Investigation and preparation of Road Projects” (IRC : SP : 19 : 2001) . This manual
is focused on various surveys and preparation of Reports at - Pre-feasibility level,
Feasibility level, (Preliminary Project Report) and detailed Engineering and
Construction planning level (Detailed Project Report). At Feasibility level, the
project proposal is studied for soundness of engineering design and more importantly
for the expected benefits from the project investments. Hence, during feasibility stage,
435
socio-economic aspects are studied in terms of population, productions and growth
rates at regional/state level and project influence Zone level, but all leading to the
economic evaluation. This manual suggest to include financial analysis with different
financial scenarios (Sensitivity analysis) exhibiting cash flows, minimum construction
time and toll (revenue from the project in the BOT Projects) but no specific details
are given and no where mentions for willingness to pay from the user side. In fact,
the. feasibility reports are the basis for according administrative approval, while
making an investment decision. But the important aspect of WTP from the demand
side of the service is not yet touched at planning stages of project.
The international consultant have introduced trend to conduct some survey in India
for estimating willingness to pay of all the modes of traffic offering them a range of
toll level to choose from. For example, the users of Vadodara -Halol road were given
options of Rs. 0.5/km; Rs. 0.75 /km; Rs. 1.0/km and Rs. 1.5/km to respond within
available options of - Totally not acceptable; Not acceptable; Neutral; Acceptable;
Highly acceptable. This approach is found like WTP surveys conducted for
environmental public goods wherein stated or revealed preferences of respondents are
collected for proposed improvements using contingent or hedonic valuation(Field
2001; Kolstad 2000 and Perman et aL 1999). The non marketability of environmental
goods however differentiates environment goods from established market of toll
roads. Still methodology followed by consultants’ world over for conducting WTP at
planning stage for toll projects has been on the lines of environmental public goods.
Thus, respondents are explained about improvement and future benefits of the toll
road project and their preferences are gathered. This survey becomes part of the
feasibility report and the results are used to fix the toll levels for each type of vehicle.
The questions asked for a toll project can differ consultant to consultant but in any
case the WTP survey practiced by the consultants does not quantify and inform the
respondents for their likely savings (like gathering revealed preferences). The purpose
of such survey is mainly to gather response for likely acceptable toll level (e.g.
acceptable toll to atleast 70% of respondents is considered as acceptable to all). The
consultants also use Road users’ cost study ( IRC : SP: 30 : 1993) which is in fact a
manual for economic evaluation of highway projects. The manual considers all
vehicles under a mode (e.g. car, truck, LCV) as a generalized vehicle irrespective of
brand and age of manufacturing ( differentiating between old technology and new
436
technology in case of cars). The approach is more' focused on road way factors viz.
pavement width (two lane, four lane etc.), roughness of riding surface (mm. per Km.),
vertical profile (rise and fall in meter per Km.) etc. The manual is like ready reckoner
for finding per Km. distance related vehicle operating cost in terms of cost for fuel,
tyre, lubricants, spares and maintenance along with fixed and depreciation cost as a
time related operating cost. Similarly, money value of travel, time of passengers
( Rs./Hr.) and value of commodity in transit ( Rs./Day) are specified. The manual
suggests calculating vehicle operating cost, accident cost with and without
improvement and thus deriving the benefit from a project to a user. The manual does
not link the calculations to the toll payments or revenue generation. Instead it
considers cost of construction and regular road maintenance cost of construction as a
cost and benefits as it comes from improved road conditions, which in turn derives
Benefit/cost ratio, Net present value or Internal rate of return. Thus, the manual is not
covering toll/revenue related aspects. Also, the manual is estimating cost per km
averaging for life of vehicle. Hence the cost estimated per km is not instantly payable
for every km travelled; benefits derived are not instantly gained on hand.
Given this background, the estimation of WTP for a road project seems to be
academically yet new area for planning and operating a facility. Of course, the WTP
study undertaken herewith is not intended to focus on project viability, likely toll
income and fixation of toll level by means of WTP results (as normally the
consultants do) but to understand the attributes for WTP and reasoning underneath .
6.6.2 Structuring WTP Questionnaire For Car Users And Truckers On

Vadodara-Halol Toll Road:
As discussed above, field surveys are conducted for car and trucks to understand WTP
for use of Vadodara - Halol Toll Road. A pilot survey for truckers and car users was
conducted to structure the questionnaire that was like informal discussions with car
users and truckers at toll plaza without carrying written questionnaire and that helped
in shaping the questionnaire for inclusion of various aspects on WTP. The survey
questionnaire is prepared on basic tenets of exploring vehicle operating cost of sample
vehicle (car/truck) and perception of savings due to use of above toll road. The
questionnaire for car and truck are structured on same line except minor change in
437
some questions. The questionnaires administered for present study of cars and trucks
is appended at Appendix: 1 and Appendix: 2 for ready reference.
6.6.2.1 WTP Questionnaire For Car Users:
The questionnaire for gathering WTP on Vadodara- Halol toll road in case of cars is
structured in following parts.
1.0. Awareness of respondent for tolling concept and toll roads.
The questions are hinting at shortage of funds in public exchequer and hence levy of
tolls/cess. The respondent is made aware of tolling principle in case he is not. He is
expected to perceive that toll roads are built from private investments in absence of
Government’s incapacity and are meant for better service levels. Then the respondent
is asked for his experience as such on any toll road. The fuel cess and project based
tolling are put up to the respondent for his preference, given the idea of financial
crunch in the Government sector.
2.0. Origin / Destination and Purpose of current trip
The respondent may be on business trip or social trip. He may be traveling only on
project road or beyond that. His frequency on the project road can be an important
factor. Some personal details are asked for income, ownership of car and education.
3.0. Mechanical data of vehicle: -
Registration number, vehicle brand, age of vehicle, fuel type, average, monthly km.
travelled by the respondent, monthly fuel bill ( fuel mileage per liter), monthly
average maintenance and monthly total tolls being paid etc. details are collected.
4.0. Presentation of study project details:-
The project road provides a services road on the both side of carriageway ( it is 4
meter wide) which is meant for local people for access to their villages and no
through traffic is admissible but in fact, service road is used as an alternative free road
and more to add, it is the tendency of two wheelers, and cars to travel on parts of toll
road illegally. Under this reality, a comparative scenario for four lanned divided
438
carriageway toll road- service road- earlier two lane state maintained road is provided
to the respondent. He is given idea of likely saving in mechanical cost and time (as
per IRC: SP: 30) in each case. He is asked for his views on this estimated savings, if
he agrees upon. This is in fact perception of consumer surplus available to him.
5.0. Response for WTP :-
Given the perception of occurrence of savings to the respondent, response for toll
level is requested on given value of Rs. 0 (i.e. preference for as it was when
maintained by Government as a two lane road), Rs. 15 (i.e. half of present official toll
rate for car at the time of survey), Rs. 30 ( prescribed official toll at the time of
survey), Rs. 65 (estimated saving) and for any otherwise value he feels to quote. But
the response is asked in terms of highly acceptable, acceptable, OK, not acceptable
and totally unacceptable. The tolling authority has provided option of commuter’s
passes wherein average toll per journey is Rs. 15 but they carry limits on No. of
journey per pass or time limit. The tolling authority has not much publicized this
option on the site. The response for pass holders is requested on percentage above /
below the present toll level for them. If the project facility is required to be improved
further and what additional WTP will be offered by the respondent is also requested.
This sub question also consisted to ask perceived savings on Vadodara- Halol road as
compared to savings derived from available standards (IRC-SP-30). But practically
the respondents were not clear about perceived savings and hence the perceived
savings data was not available from many respondents. The respondents were
replying some times that they think the saving derived using standards might be right
or they refused to answer within available interaction time.
, 6.0. Quality of Road on Other parts of Journey:
Since, Vadodara and Godhra are well connected on various aspects and hence Halol-
Godhra stretch is also important for those who travel beyond Halol. A separate sheet
is attached to main questionnaire to assess WTP on Halol-Godhra road which is also a
good quality road improved under World Bank aided Gujarat State Highway Project
(GSHP) in 2002. It is with 10.0 mt. wide bituminous carriageway without divider
Central verge. For the given traffic level, Halol-Godhra road is also having
comparable features and hence WTP on this stretch (given the estimates of savings
439
due to improvement) is checked on the same lines as toll road between Vadodara-
Halol. Though Halol-Godhra is at present free road (it is free from the beginning) the
respondents were asked for their response under the circumstances Government
imposes tolling on this stretch. Hence, respondents are asked to envisage that both the
stretches between, Vadodara-Godhra are tolled. It was asked for convenient burden
they can carry owing to this tolling. As emerged from pilot study, tolling experience
on other stretches carried significant impact on WTP on toll road project. The
respondents are interested in getting better quality of road in full length of journey.
The response for WTP on Halol-Godhra road is useful in deriving worth of service
felt by the users and total tolling the respondent feels acceptable when he travels
between Vadodara and Godhra . As emerged out from the discussions during
surveys ( especially pilot survey), people often consider what ever toll levied on
Vadodara-Halol Road as a total toll from Vadodara to Godhra ( i.e. toll for full
journey while traveling between Vadodara and Godhra. Hence, WTP expressed on
Vadodara-Halol toll road and WTP expressed on Halol-Godhra road are quite
correlated. The WTP expressed on Halol-Godhra free road is indicative of level of
satisfaction being drawn on this stretch and in turn indicating level of satisfaction in
total length of journey between Vadodara and Godhra. One can presume that if the
Halol-Godhra road is well maintained, WTP on Vadodara-Halol road will be
positively affected and vice versa. Extending the idea, WTP on Vadodara-Halol Toll
road can be considered dependent upon tolls being paid on other parts of journey and
or level of satisfaction accomplished on other stretches.
7.0. Ranking of common attributes for toll payment :-
The respondents are given a list of attributes like time saving, lower maintenance
higher speed, access control and safety, comfortable journey and road side amenities.
They are asked to rank from 1 to 3 for each attribute indicating weightage an
individual attaches to each of attribute while paying toll. e.g. a respondent may attach
=1 (Highest) for higher speed and = 3 (Lowest) for road side amenities.
6.6.2.2 WTP Questionnaire for Truckers:
The questionnaire for gathering WTP on Vadodara- Halol toll road in case of truckers
is structured just like for car users except some minor changes. All aspects like-
440
awareness of respondent for tolling concept and toll roads; origin / destination related
details; frequency of journey on Vadodara- Halol road; mechanical data of vehicle
(fixed/variable cost of vehicle per km); presentation of study project details (earlier
situation and improvement details supported with estimates for saving in VOC and
time); quality of road on other parts ofjourney; ranking of common attributes for toll
payment; perceived savings and stated value of WTP etc. were maintained as per car
users. Deleting sub questions like purpose of journey, income, education etc. was
suitable to respondents. The mechanical cost data for fixed cost was found almost
same for all trucks on long distance travelling and hence thrust was more on
collecting diesel cost per km and tolls paid per km on full length of journey. Most
significantly, the data for WTP response was found coming more under irritation and
was responded as a point data unlike case of cars where response was ranging from
OK to Highly Acceptable. The response to details for Halol- Godhra stretch was
found lackluster mainly due to truckers travelling extensively beyond Vadodara-
Godhra. A question for WTP on expressway between Vadodara- Ahmedabad was
asked for testing inclination for long distance access control facility which was not
entertained by respondents. However; WTP was asked for existing full length of
journey at status quo and also for point to point access control 4-lane facility if
provided. The idea was to identify underlying issues when a trucker passes through
any toll road e.g. Vadodara Halol road and the questionnaire was structured to
recognize a major stretch of journey under taken by that respondent and collecting
details for frill joumey(one side) and then reducing the arena of dialogue for
Vadodara- Halol road.
6.6.3 Sampling Method for Car Users And Truckers For WTP Survey:
The sampling of car and trucks in a traffic flow on Vadodara-Halol Toll road is
practically difficult to exercise as all the road users prefer toll roads to reduce the
travel time. Any random stoppage of car or truck can create bottlenecking effect on
traffic. The stoppage of vehicle on toll road was personally felt creating hostile
conditions as the road users were feeling that survey is being conducted for
commercial purpose may be establish toll acceptance of prevailing toll rates. This
situation required good dialogue with respondents on academic line and was felt
possible in case of car users who were aware of such academic exercise and prestige
441
of MS University of Baroda. Hence, only cars were surveyed near toll plaza and law
and order conditions were taken care of by staff on toll booths to guide the traffic
smoothly when a car is being surveyed in the flow of traffic.
6.6.3.1 Sampling Method for Car Users:
The survey of cars traveling towards Halol was physically conducted on 27/4/06 at
Vadodara side toll booth and on 2/5/06 at Popatpura village (near Godhra on Haiol-
Godhra Road) for cars going towards Vadodara with kind consent of the
concessionaire. The sampling was done on random basis and respondents were asked
to opine on the site or were requested for contract number. Since the respondents
would be in hurry, attention was paid on queries and discussions during personal
interview and response was documented before proceeding for next respondent. There
are hardly 200 to 250 cars (total for both directions) plying per day on Vadodara-
Halol - Godhra Road and 33 samples per day (this is 16.5% of daily population)
could be collected (i.e. total is 66 No.) which is felt quite meaningful for the given per
day population. The consultants in this field are found generally taking 10 to 15 % of
sample from daily population in conducting WTP survey. On an average, maximum
five respondents were interviewed per hour.
Native wise these 66 observations were mainly cars either registered in

Vadodara District (i.e. GJ-6 or in Panchmahals i.e. GJ-17) and were local traffic. The
breakup of these observations is given below
Vadodara District : 26 Nos.

Panchmahals District ; 23 Nos.
Other District : 13 Nos.
Other states : 04 Nos.
Total : 66 Nos.
Moreover, out of 66 observations, 5 respondents were found using hired car. (i.e.
small fraction of less than 8% ) This is very small fraction. During the discussions it
was emerging that, earlier cars were hired at about 7 to 8 Rs. per Km. Then diesel was
costing around Rs. 15 per liter where as despite diesel costing at Rs. 35/- per liter the
market rate of hiring same car is at Rs. 4 to 5 per Km. Hence the market is stated to be
442
too competitive. It is argued by the rental car providers, any benefit to the Mechanical
cost saving of a car is reflected into benefits to the car hirer, in terms of better cars
and lower rent. Looking to this, no discrimination is made on this matter and no such
discrimination was observed from response side. It is also necessary to note that, as
found in survey results, respondents do not seem to calculate savings in vehicle
operating cost due to improved road conditions. It is like intangible benefits to the car
users. Basically it is saving in time, safety and comfortable journey which really
mattered in expressing WTP, of course, keeping some vague idea of saving in VOC in
mind. Hence hired cars are not discriminated from owned cars in general.
6.6.3.2 Sampling Method For Truckers:
Unlike the onsite survey of cars, during month of September 2006, survey of truckers
was conducted for total 40 respondents mostly in the offices of truckers. The
spontaneous response of car users (who were generally educated any belonged to
local districts) was felt not meaningfully possible from truck drivers on toll road itself.
More over, stopping a trucker on toll road was like creating bottle neck in a traffic
flow. The respondent was having fleet of one to many (some times more than 250)
trucks traveling on Vadodara-Halol road. The sampling was done on random basis
among total 250 of population (as known from office of Baroda Transporter
Association) of transporters in Vadodara. Some times the business of transportation
was found being handled by an established transporter who will hire the services of
petty truck owners or transporters themselves owned large fleet of trucks. But in all
case, the market fere was collected by transporter and he was found fixing terms with
actual drivers who were many times owners of one or two trucks. The drivers were
found given contingency money to pay for variable costs for diesel and toll costs. Any
savings in this cost was meant like bonus for drivers. In any case, if perceived savings
on toll road were real, the demand for services were to respond positively and making
dialogue with transporter in presence of truck driver was envisaged as fruitful to
study issues in using a toll road. More, over, the trucks of 6wheels and 10 wheels were
found being used by truckers. Looking to changing technological preference, all
samples of 10 wheel trucks were selected. Hence these vehicles were found paying
Rs. 140.0 per one side journey on Vadodara - Halol toll road.
443
6.6.4 WTP Results For ear Users and Truckers:
The survey response gathered for both the modes of surface transport are some what
subjective but some answers given on analytical aspects are found useful to conduct
empirical analysis of WTP for selected toll road. The quantitative analysis is
conducted using Microsoft Office Excel Worksheet.
6.6.4.1WTP Results For Car Users:-
As discussed in subsection 6.6.2.1, the WTP response for car users is gathered on
three levels- Highly Acceptable (that is bare minimum), Acceptable (perceived fair
enough) and OK (that is upper threshold). The respondent is free to quote any amount
of toll preferable to him keeping present toll level and savings in his VOC and time in
view. Before exploring analytical dimension, survey response and subjective findings
for car users are found as below.
1) Due to nature of site survey, questions related to income and education were
not appreciated. Thus these questions lost their significance at the survey stage
itself. Similarly, regarding common attributes guiding to pay toll were
recognized by the respondents while ranking. They responded that every
attribute (attributes are listed in questionnaire- time saving, lower maintenance
higher speed, access control and safety, comfortable journey and road side
amenities) is responsible for generating WTP and ranking was not possible to
reply meaningfully. Though, the response to ranking was recorded but the
personal feeling was they responded in hurry without analyzing much. So
users were familiar with these attributes but no hedonism for individual
attribute was observed.
2) Most stunning finding was none has expressed zero tolling for Vadodara-Halol
stretch. The zero tolling was meant to be understood as road is maintained as
per availability of State funds and no early improvements/widening. It is very
significant to see that users have accepted to pay separately for improved road
conditions under existence of multiple taxes especially on transportation. On
Halol-Godhra road, except meager exceptions of 16 respondents, remaining 50
respondents (i.e. 75%) have favored some tolling. This is remarkable response
knowing the fact that this stretch has been freely used by the users since last
three years and it is improved/maintained comparable to Vadodara- Halol by
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the state administration. Thus, the user’s perception and behavioral response
for positive aspects of tolling is coming out explicitly.
3) The response to estimated VOC and time savings was affirmative but not
conclusive. Everybody agreed to lower operating cost of vehicle under
improved conditions where as time saving was evident by itself. The
explanation to WTP on the basis of these savings in VOC and time is not
found appreciable in surveys. Many users admitted that they have no exact
idea on this and hence they simply said “OK” to estimated value of VOC
informed to them. Some have given qualitative response like “ Less” or
“More” . Few also quoted lower side actual figures. During discussions,
argument for under quoting of VOC savings was related to rash driving at
higher speeds. Though the project road carries maximum speed limit board of
80 Kilometer per hour (Kmph), the tendency to drive around and above 100
Kmph is natural in case of new generation cars. The fuel efficiency is
hampered at this high speed. More over, braking on such speed can be
dangerous and may exert higher wear and tear. Another argument is,
practically the estimated VOC saving is too high to be realized. They said, the
State roads in Gujarat were never those bad to produce such a big savings in
mechanical cost. To generalize, most of respondents do not have exact idea for
savings occurring to them due to lower VOC and they do not really carry clear
idea for even their time value. On the dates of sample survey, service roads
were available like alternative free roads for cars. But the quantitative
comparison of VOC and timesaving given to them were really new to them.
As being the foundation of charging toll, VOC and timesaving shall be
known to the users in better tangible maimer. A consensus shall be arrived on
that. Vague ideas for such important component can distort generation of
WTP. In fact, proper understanding on this can generate better WTP. Most
importantly, the fuel economy for each vehicle can differ due to type of fuel
(diesel, petrol, CNG /LPG), age of vehicle and type of manufacturing. If input
fuel cost by itself reduces, the improvement in road condition may not effect
any significant net saving owing to low input cost.
4) If a user is having long journey including this 32 Km. on project road, the
VOC losses on other stretches can be high enough to eliminate gains on the
project road. In such cases, WTP on small stretch of 32 Km. cannot be at
appreciable level despite obvious improved conditions. This fact has often
445
compelled the consultants to target only 2/3 of estimated gains from improved
road conditions while deciding toll levels.
5) Despite lot of chaos in estimated and actually perceived VOC savings, users
have responded to WTP questions on positive note. The questionnaire
provided WTP in three levels- Highly Acceptable, Acceptable and OK The
response for highly acceptable and acceptable was like deciding worth of
services. For OK level response, some effect of existing enforced toll level on
project road was felt prevailing. Also, it is the highest toll level a user thinks
he can go with. Totally 12 no. of respondents expressed additional WTP if
hitches like plying of two wheelers on toll road, better access control ( e.g.
barricading like Ahmedabad-Vadodara Expressway) and illegal entry of
vehicles from service road is attended. Hence these users showed positive
response in further development of project road, learning from better toll roads
like expressways. Regarding Not Acceptable and Totally Unacceptable
category, no values were quoted by the respondents. This is due to non
availability of alternative comparable route and tentativeness in understanding
of sarongs accrued due to improved road conditions.
6) The respondents significantly expressed unwillingness to pay higher tolls on
Vadodara — Halo I toll road claiming that they pay huge amount around Rs.
50,000/- to State government (R.T.O.) while registering the vehicle, fuel cess,
road taxes, octroi, income and sales taxes/ VAT etc. Out of 66 respondents,
45 respondents strongly criticized other taxation effects even then reasonable
tolls were quoted by them ( around Rs 20/-) for the worth of services of toll
road. But this odd lot raises the perils of political unacceptance of tolling
policy. Respondents are agreeing that VOC and time savings are in general
substantial as compared to WTP shown by an individual. For this discrepancy
(i.e. lower WTP as compared to savings accrued ) they strongly represented
that State shall provide a free road for already prevailing taxes and hence they
think the present toll level on Vadodara -Halol road is too high and hence the
lower WTP. This is understandable.
7) The Vadodara - Ahmedabad Expressway is almost three times in length but
the toll rate is Rs. 64/- for cars and here it is Rs. 30/- for 32 km length. This
comparison is also brought to the notice by some prudent respondents.
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6.6.4.1.1 Analytical Results of WTP For Car Users:
The mean value (along with standard deviation) of WTP for all three levels (Highly
Acceptable, Acceptable and OK) is tabulated in Table:VI-5 for sample size of 66. It is also
done separately for both sampling locations i.e. each side 33 samples.
Table: VI-5
Mean For Car Users On Vadodara-Halol Toll Road (Figures in Rs.)
(A) Mean WTP For Cars On Vadodara-Halol Toll Road For All 66 Samples
Highly
Acceptable. Ok
Parameters Acceptable
Wtp:Y2 Wtp:Y3
Wtp:Yl
MEAN 18.15 20.13 23.11
STD DEVIATION 6.95 8.05 8.94
NO. OF OBSERVATIONS= 66
(B) Mean WTP For Cars On Vadodara-Halol Toll Road For Each Side 33 Samples
Highly
Acceptable. Ok
Wtp:Y2 Wtp:Y3
Wtp:Yl
(1) Origin At Vadodara And Going Towards Halol - Godhra
MEAN 19.03 20.78 24.16
NO. OF OBSERVATIONS =33
Highly
Acceptable. Ok
Wtp:Y2 Wtp:Y3
Wtp:Yl
(ii) Origin At Popatpura And Going Towards Vadodara
MEAN 17.27 19.48 22.06
NO. OF OBSERVATIONS=33
(Source: Derived From Field Survey Results For Car Users)
The following findings are deduced from results given in Table:VI-5.
1) The mean value of WTP for above three levels (considering 66 samples) is
found Rs. 18.15 ( Std. Dev. 6.95 ), Rs. 20.13 ( Std. Dev. 8.05) and Rs.
23.11 (Std. Dev. 8.94) respectively. The incremental effect is due to the
very definition of these three levels. In every case the individuals showed
44/
WTP in very wide range of variation. Since, OK results are meant to explain
upper ceiling of WTP, the mean for this level has given highest values
whereas Highly Acceptable is meant to show most desirable and hence
generally lowest value. The difference between these two bounds is found
approximately of Rs. 5.0 and that is about 20% of OK values.
2) The mean values in all cases are lower than prevailing toll level of Rs. 30.0 for
example; OK level is about Rs. 7.0 less than (or about 20% less than)
prevailing toll rate. However out of 66 samples, 25 numbers of samples
reported Rs.30.0 or more WTP in this survey including highest value of Rs. 45
for two respondents. This higher WTP is expression for removal of hurdles
like two wheelers are forced to move on service roads and tolling process is
made comfortable etc.
3) The bifurcation by survey location does not make large difference on values of
mean WTP. The WTP for journey towards Vadodara was found showing little
lower side results.
4) The petrol fuel cars are found 26 numbers in total sample size of 66. The mean
and standard deviations are found Rs. 23.89 and Rs. 10.48 respectively for
these petrol users in OK category. This shall mean respondents are not
differentiating between cheaper and higher fuel cost for paying tolls. The
reasons could be, the stretch of toll road is only 32 km and hence, no
substantial saving due to type of fuel is perceived by respondents.
5) Similarly, respondents travelling beyond Vadodara- Halol are 51 numbers out
of total 66. They travel on Halol- Godhra stretch which is free road with good
riding surface and has comparative standard of services. The mean and
standard • deviations are found Rs. 24.27 and Rs.9,0 respectively for these
respondents. Practically it is no different to overall mean but looking to their
numbers, they are 77% of total sample size. The remaining 15 respondents,
who are using only Vadodara- Halol stretch, have mean and standard deviation
Rsl9.15 and Rs. 7.74 respectively for OK level. Hence, in fact total 66
samples have reached the WTP to the level of Rs. 23 to 24 in OK category due
to these respondents who use Halol- Godhra road also.
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6.6A.2 WTP Results For Truckers
As discussed in subsection 6.6.3.2, the WTP response for truckers is gathered on

single level unlike three levels attempted for car users. This was practical
consideration taken into account while surveying truckers who were in fact found not
interested in discussing and understanding purpose of survey. In case of car users,
perceived savings on toll road were found not tangible in response to survey. Here,
truckers being commercial operators and having all India exposure of road categories
and service standards, the perceived savings was emphasized in gathering survey
response. This has helped in analytical aspect of this survey. Before exploring
analytical dimension, survey response and subjective findings for truckers are found
as below.
1) All truck vehicles surveyed were paying Rs. 140.0 per journey on Vadodara-
Halol toll road. Similar to car users, tolling has now seems accepted by
transporters as indispensable charge on use of facility. Now the tone from
users is for rationalization and value for money spent.
2) The major issue that emerged in discussions with every respondent was heavy
fixed cost of owning and driving truck on national or three state permits. The
cost of tyre renewals, servicing, body work were cited as other huge attributes
for variable cost. After getting in to thorough discussions with some of
experienced transporters, such expenses other than diesel consumption and
tolls paid were generally found at Rs. 3.9 per km. The prevailing market fare
for a typical to and fro Vadodara- Delhi journey was found around Rs. 15.0
per km. Hence the fixed cost forgone while accepting transport job was found
around 25% per km. The next attribute was found major one for diesel
consumption. This was found around Rs.10.0 per km for an average condition
of a truck. This is further 66% of the total fare demanded. If we add Rs. 1.6
per km for tolls being paid on above route, it results in to further 10% of
running cost and practically the business is claimed with meager profits except
during some peak period e.g. festival days. The thorough discussion revealed
that truckers can get consignment for one side at good rate and return journey
is generally at little more than half rate except the operator has good offices on
both ends. The overloading and sundries collected for enroute short distance
consignments were told helping many of times.
449
3) A major feeling received from respondents was, there was no waiting business
opportunity at any end. Hence, a driver has to stay for days to grab proper fare
or has to accept lower fere for his return journey.
4) A major touching woe of truckers was they were always treated inferior by
State authorities for highways and also by toll plaza staff. They complained of
insulting behaviour despite paying hefty tolls on all tolling locations and
compared that the toll plaza staff do not dare to misbehave so with car users.
The facilities were mostly told missing for comfortable journey e.g. break
down services at reasonable price, toilets, potable water, parking lanes etc.
5) Another complaint from truckers was for inconvenience on interstate borders
, that waste lots of time and money rendering savings on toll roads meaningless.
Some transporters suggested conduit type travelling where irrespective of
State borders, through passage up to destination is assured saving lots of
money and time for them Knowing the fact it is utopian situation, the WTP
for tolling in section or frill length ofjourney is stated to remain lower.
6) The transporters working in a formal manner said that they are booked for
annual contracts on Metric Tone basis mutually agreed rate by companies like
Reliance, Sun Pharmaceuticals etc. Such agreed rates do not include tolls and
insurance charges. Hence, any hike in tolls is to be borne by transporter only.
Some of the agreements even do not protect for increase in diesel cost which
requires renegotiation under compromise. Such renegotiation is not allowed
for toll rates in market.
7) The transporters were found handing over truck drivers the consignments with
predecided provision for enroute tolls, diesel costs and maintenance. The
owners were skeptical for actual expenses claimed by drivers after improved
road conditions all over India especially on NH. A spontaneous response for
perceived savings on 4-lane toll road per 100 km was given as 3.5 liter of
diesel as an instant gain and Rs. 100 for maintenance on long term basis saved.
Thus it should mean saving of Rs. 1.3 per km on diesel and Rs. 1.0 per km on
maintenance shall give total savings of Rs. 2.3 per km. But the perceived
savings and WTP are not quoted that high while replying for questions. It was
expressed that diesel saving is generally cornered by drivers and maintenance
savings was felt reaching to owners. The irregularities at diesel selling pumps
were also suspected by transporters for not realizing actual savings in fuel.
450
8) Unlike trains, trucks can not carry freight travelling more than j|x hours at a
stretch. However, it was conceded by the respondents that substantial time
V-\ ■
saving is now possible on Vadodara- Delhi route due to improved conditions o

this corridor. This has reduced journey of two to three days into 24-30 hours
only. This journey was said possible to reduce merely to 18-20 hours if
extra/reliever driver was available in the journey and time is saved on State
borders and at toll plaza. However, time saving on Vadodara-Halol being
meager, the respondents were not enthusiastic for this aspect on this limited
stretch.
9) The respondents significantly expressed unwillingness to pay higher tolls
recalling heavy taxes paid to Government while registering the vehicle,
excise, fuel cess, road taxes, octroi, income and sales taxes/ VAT etc.
Respondents are agreeing that VOC and time savings are in general substantial
as compared to WTP shown by an individual. For lower WTP as compared to
savings accrued, they strongly represented that government shall provide a
free road for above taxes and in absence of it they think the present toll level
on Vadodara Halol road is too high especially for additional axle. All of the
respondents blamed other taxes affecting WTP.
10) The issue of saving in VOC is very technical and is dependent of prevailing
rate of fuel. If a vehicle is adapted to consume some alternative fuel, WTP and
perceived savings will differ dramatically. Hence, WTP data gathered in any
survey is invalid when fuel price changes or vehicle undergoes major
technological change. Despite lot of chaos in estimated and actually perceived
VOC savings, users have responded to WTP questions on positive note.
11) One important aspect featured in discussions with respondents was about
cessation of tolls. The respondents were skeptical for cessation of toll on any
road after recovery of costs. In fact they wanted transparency in tolling
account demanding access to data for number of days left to recover the cost
of project. Hence, basically they agree to cost recovery concept but expects
that it should have logical end. The users frequenting on Vadodara- Halol
were more concern about such aspect.
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6.6.4.2.1 Analytical Results of WTP For Truckers:
The mean value (along with standard deviation) of WTP for Vadodara- Halol Toll
road and also for overall length of journey is tabulated in Table: VI-6 for sample size
of 40. Here, the response is gathered on per km basis for savings on Vadodara- Halol
Toll road. Since damaged conditions of roads in remaining leg of journey was felt
influencing the WTP on Vadodara- Halol Toll road, the WTP for full journey was
explored in this case. The WTP response is gathered for Vadodara- Halol Toll road
and for hill journey length (for as it is scenario and imagining four lane road like
Vadodara-Halol for full journey).
Table: VI-6
Response For Per Km Saving and WTP For Trucks
Parameter Perceived WTP on WTP on WTP on

Saving on Vadodara- existing existing
Vadodara- Halol road condition of condition of
Halol road (Rs. Per Km) full stretch of full stretch of
(Rs. Per Km) journey (Rs. journey if all
Per Km) 4-lane (Rs. Per
Km)
Mean 2.17 1.93 0.74 1.14
Std. 1.14 0.87 0.44 0.44
deviation
No. Of True <ers Surveyed =40
(Source: Derived From Field Survey Results For Truckers)
The following findings are deduced from results given in Table: VI-6.
1) It is pertinent to mention that all vehicles surveyed were paying Rs. 140.0 per
journey on Vadodara- Halol toll road which meant toll being paid was @Rs.
4.4 per km. Hence, around half of toll being paid is found justified by the
respondents considering perceived savings of Rs. 2.17 per km. Also despite
many problems narrated by respondents, the tolling has acceptance to
significant level. The user’s perception and behavioral response for positive
aspects of tolling is coming out explicitly. The respondents are ready to pay
Rs. 0.74 per km even in existing condition of road where samples included
various highway stretches of really pathetic quality spread in many States. In
case of improved service standards of access control four lanning, the WTP is
452
found @ Rs. 1.14 per km. This is again 50% of prescribed toll level of Rs.2.10
per km for trucks on any 4-lane NH as per NH Act 1956 (See Table:VI-4
Subsection: 6.4).
2) The mean value for per km WTP on Vadodara- Halol Toll road is found
higher than WTP for full length of journey (with proposed 4-lanning and
existing conditions). This is mainly due to absence of tolling on further
stretches up to Gujarat State border despite improved road conditions. The
respondents were found ultimately crosschecking overall burden of tolling in
full journey. Hence, RS.1.14 per km is actually better estimate of WTP but it
is only 25% of tolls being paid by truckers on Vadodara- Halol Toll road. As
discussed in Chapter-V, subsection 5.6.4.2, the length between Halol to
Shamlaji (State border) is under four lanning and will be a tolled road and this
toll liability will influence WTP on Vadodara- Halol Toll road. As emerges
from survey response, truckers will be willing to pay only at the rate of Rs.
1.14 per km and hence WTP of Rs. 1.93 is not a real preference for truckers.
3) The perceived savings of Rs.2.17 on Vadodara- Halol Toll road is however
more than Stated Preference of Rs. 1.93 per km. But the factors discussed in
above subsection 6.6A2 are not allowing respondents to pass on savings for
WTP on Vadodara- Halol Toll road.
6.6.5 Model Building Process of WTP for Toll Road:
The present practice adopted by international consultants is based on contingent

valuations of Environmental problems. Wang et al. (2004) in a World Bank Study
have used a contingent valuation framework while studying WTP for improvement of
a lake Sevan in Armenia for the value of an individual’s utility function V0 at status
quo condition as
V0 = V (Income, Price vector, initial environmental quality, vector of socio-economic

variables, uncertainty related error term)
Wang et al. have solved above utility function for WTP while improving
environmental quality from E0 to Ei. They have identified relevant variables and
questionnaires were prepared for stated preferences. The results were useful in
deriving a regression model for explaining significance of all such variables in
453
explaining WTP. Taking the base of this utility function, brief theoretical framework
is outlined as below for conducting WTP survey on Vadodara- Halol road. The
subjective discussion given under subsection 6.6,4.1 and 6.6.4.2 is helpful in
identifying attributes helpful in explaining a road user’s utility function. Hence, a
general utility function is first assumed and it is transformed in to a multiple variable
regression model as below subject to conditions that each attribute (Le. independent
variable) is individually turning up statistically significant along with whole
regression model.
A generalized utility valuation framework under uncertainty of travelling

characteristics of road and user himself can be assumed as
U0 : U(Y,P„,E0,Z,g)..............(i)
Where, Utility at Original situation (U0) is dependent upon
Y = Income,
P = Price payable per Km journey
E = Service Level of the road/ bridge in terms of comfort, safety etc

affecting VOC of vehicle
Z = Vector of Socio-economic variables and
e = Uncertain factors which are not reflected in Y, P, E and Z
Assuming that an individual is willing to pay a maximum amount (keeping same level
of utility U0) termed as WTP for improvement of service level ( E0 to Ej) of
Road/bridge also measured in terms of change in total prices payable by the user (P0
to Pi) such that
U0 (Y- WTP, Pi, E„ Z, e ) = U0 ( Y, P0 , Ec, Z, e)..................(ii)

and it yields
WTP = WTP(Y,P0,P„Eo,E„Z,g) ........................... (iii)
454
Where, WTP can be a random variable transformed as
WTP = E [WTP] +61; e i is a random term with mean value of zero. Every individual
respondent has a distribution with a mean jx (p =E [WTP]) and variance a2. The
mean and variance may vary across different individuals. Now this WTP is assumed
to follow a regression model as below. (Wang et al. 2004).
WTPj = Po+Xip + e, ...... .................... (iv)
Where Xj is a vector of explanatory variables with unknown coefficients P ; po is the

intercept and e i is usual random term. For simplicity, it is assumed that WTP for an
individual i is following a linear specification. The model will be tested statistically
and model will emerge out significant if the linear specification really exists.
The Xi carries host of variables as briefed in equation (ii). This will include income
level, Socio-economic variables like education, vehicle ownership, frequency of
journey on project road, purpose of journey on project road, mechanical and time
related prices (costs) payable under with and without improvement conditions and
other prices payable ( Other taxes, tolls etc.) in the journey. The qualitative
satisfaction ( E0 to Ei) is due to improved riding quality. Hence, actual regression
model shall be of multiple variables as X is consisting of many variables as construed
below (Gujarati 2006).
Yi= Po+ PiXu+p2X2+ p3X3i +Ui ..........................(v)
Where Yj= Dependent variable, here it is WTP for study road expressed by
individual i ■ -
Xi, X?„ X3 and X4.,etc. = explanatory variables, here it is perceived savings,

frequency on toll road, per km operating cost for vehicle etc.
Uj =disturbance term which is unexplained portion of equation
Po=intercept or WTP when all factors explaining WTP are zero
455
Pi, P2, P3, P4
= partial regression coefficients, here each gives change in value
of mean WTP when there is unit change in corresponding explainable
variable X when other variables are unchanged. For example, change in mean
WTP when “perceived savings” is changed by unit holding other variables
constant.
The equation (v) is to be solved for given samples and estimates for above
coefficients are to be found. This task is done using widely available Computer
Software - Microsoft Excel in Microsoft Office 2003 (or the same is available under
Window XP). The results are tested for goodness of fit (multiple coefficient of
determination R2) for making sure all variables in combine explain variation in Y
significantly. The standard practice of regression analysis also requires (Gujarati

2006):
1) to look at adjusted R2 to be significant that will take care of degree of freedom
while estimating goodness of fit.

2) testing the individual partial regression coefficients for individually having
influence on Y (i.e. testing for example individually P2 # 0 holding other
variables constant) either using t- statistics compared with critical t- value for
given degree of freedom or p-values obtained for individual coefficients may
be verified for being less than 0.05(i.e. accepting 95% of confidence).
3) testing the overall significance of the sample regression that all variables
jointly do not become zero. This will ensure that Y is linearly related to both
Xi and X2 etc. An analysis of variance (ANOVA) technique provides F-test.
The p-value of F-results if found negligible (near zero), the overall
significance is assured.
Since the survey data is gathered for cars and trucks using toll road, separate
regression model will be constructed and tested for them. The generalized attributes
(independent variables) under the general term Xi will be chosen from subjective
discussion given under subsection 6.6.4.1 and 6.6.4.2.
456
6.6.6 Regression Analysis For Explanation Of WTP For Car Users:
To understand WTP, many attributes influencing the WTP need attention as discussed
earlier. The regression analysis can help in estimating dependence of WTP on
explanatory variables and predicting mean value of WTP. The independent variables
(X;) are identified as below to explain WTP for car users. Since WTP for car users is
recorded in three levels- Highly Acceptable (Yl); Acceptable (Y2) and OK (Y3) all
these three are dependent variables and a separate regression model is constructed
from same available set of independent variables. These independent variables are as
below.
1.0 One side frequency of trip on toll road(Xi):
How often a respondent enters toll road in a specified time interval (here it is per
month) will make him think for his expenditure function seriously. This can affect
positively if respondent has agreed with savings and are perceived more than tolls
being paid.
2.0 Monthly km travelled on ail roads (X2):
The respondent will have many journeys on various roads (with and without tolls) of
varying standards. Also, this variable is implying volume of total travelling and any
acceptance of savings and savings perceived more than tolls being paid on toll road
will affect the response positively.
3.0 Per km operating cost (X3):
Due to intangibility felt by the respondents for VOC savings and timesaving, a
theoretically very important variable “benefits” could not be included in the analysis.
Hence, variable namely per km operating cost is utilized which is also representative
of mechanical properties of any car. This cost is derived from addition of fuel cost,
maintenance cost and tolls paid per month. This is characterized by age of vehicle,
type of fuel, fuel efficiency, technological aspects of given car, type of routes
generally taken up for travelling. This is expenditure function to say. The per km
operating cost is having feel cost in major then maintenance (and least is tolls). This
variable means how costly is to travel with this vehicle. This can affect positively if
respondent has agreed with savings.
457
4.0 WTP on Halol-Godhra free road (X4):
This variable wiU quantify the level of satisfaction being drawn by the respondent on
other stretch of his journey. The relevance of this variable is emerging from
discussions held during surveys. This variable shall affect positively as explained
earlier.
5.0 Other factors (multiple taxes) (X5):
This factor has been surfacing while surveying some car users and they underquote
WTP despite acceptance of adequate savings in cost and time while using toll road.
Here an indicator variable is chosen taking value =1 if respondent attributes his lower
(lower than prescribed toll of Rs.30/-) WTP with other taxes and = 0 for those who
are not really bothered for them while expressing WTP. This variable shall have
negative effect on WTP, i.e. as the severity of other factors increases, WTP decreases.
6.0 Purpose ofjoumey(Xe):
As explained earlier, purpose of journey coupled with frequency of such journey is

expected to affect WTP. Here also an indicator variable is chosen taking value =0 for
social purpose and =1 for business, education and other purposes. It is simple to
understand that a social journey is rare to occur and the respondent may prefer
prestige by paying tolls and will ignore the economics. For business activity, the
respondent is expected to be calculated while disposing off his earnings. If the
perceived savings are adequate enough to affect WTP positively, the business journey
may support WTP positively. Here, the logical value of 0 and 1 are selected to
differentiate both class of journey. The sign expectation can be both the ways. The
positive sign shall mean basically acceptance of tolling and negative sign shall mean
basically resistance to tolling.
7.0 Intercept ((3o):
The intercept is to be interpreted as WTP before starting the journey or absolute WTP
without being affected by any independent variables. The existence of non zero value
of intercept and its sign can be useful for understanding WTP per se.
458
Here, the multiple variable regression model is assumed to take linear specifications
incorporating six independent variables to explain WTP (Y) for car users as
Yp p0+ P1X1+P2X2+ p3X3 + P4X4+ P5X5+ p6X6+Ui ..........................(vo
6.6.6.1 Regression Analysis For Highly Acceptable WTP (Yl):
The results for individual partial regression coefficients and F- test under analysis of
variance (ANOVA) technique for Highly Acceptable (Y,) WTP are summarized
under Table: VI-7.
Table: VI-7
Analysis For Highly Acceptable WTP (Yl):
Variables Coefficients Standard error t-Statistics p-value

Estimates [Pr(> 111)]
24.15834 3.060573 7.893403* 8.29E-11

Intercept
0.065823 0.037719 1.745087 0.086176

X,
2.32E-05 0.000186 0.124458 0.901376

X2
0.13247 0.729906 0.181489 0.856606

x3
0.208342 0.071343 2.920298* 0.004946
x4
-9.27771 1.399838 -6.62771* 1.15E-08
X5
-3.82307 1.656834 -2.30745* 0.024556
x6
* Indicates significance of variab e at 95% confidence level.
Regression Statistics; Adjusted R2=0.56, Standard Error=4.62 For 66 Observations
ANOVA Results: p-value of F-test i.e. Significance of F = 3.55E-10;
degree of freedom for regression^ ; degree of freedom for residual=59
(Source: Calculatedfrom Survey results)
The regression model from this result can be written as below.
Y, =24.16 +0.07X, + (2.32E-05) X2 +0.13X3 +O.2IX4 -9.28XS -3.82X6
(7.893403)* (1.745087) (0.124458) (0.181489) (2.920298)* (-6.62771)* (-2.30745)*
........................ (vii)
As discussed under subsection 6.6.5, three aspects (i.e. adjusted R2, significance of
individual partial regression coefficients and overall significance of model) are
459
required to be observed from regression analysis. For Highly Acceptable WTP case,
the overall significance of model is found very good as seen from extremely small
value of p-value of F-test (3.55E-10) though adjusted R2 has moderate value of 56%.
But individually, some coefficients have come out insignificant as evident from their
p-value or alternatively checked with critical t- value at 95% confidence interval with
59 degree of freedom (this is no. of observations minus no. of variables minus 1). The
calculated t- value for Xi, X2 and X3 is less than critical t- value of 2.0. Hence, these
variables are statistically insignificant to explain WTP for this set of data. More over,
numerical value of partial coefficient p2 is almost zero and hence it is insignificant to
explain WTP.
The sign of independent variables are found positive except for X5 and X6 in the
analysis for Highly Acceptable WTP (Yl). This is in line with discussions made in
subsection 6.6.4.1 and 6.6.6. The positive sign of (X4) that is WTP expressed on Halol
Godhra road substantiates discussions made earlier under subsection 6.6.4.1 and 6.6.6.
Higher the WTP for this free stretch of 32 km length, higher WTP for Vadodara-
Halol Toll road. The respondent is happy to use full Vadodara- Godhra road by
paying tolls only for Vadodara-HaloL Alternatively, any improvement in quality of
road in remaining leg of journey will help in improving WTP for Vadodara- Halol
Toil road if there no further tolling. The negative sign of (X5) explains the WTP has
adverse relationship than acquaintance of other taxes on road sector resulting into
quoting lower WTP. Similarly negative sign of X6 explains resistance to tolling
irrespective of purpose of journey and it has significant explanation power. A similar
exercise is repeated for Acceptable (Y2) and OK (Y3) WTP cases as below.
6.6.6.2 Regression Analysis For Acceptable WTP (Y2):
variance (ANOVA) technique for Acceptable (Y2) WTP are summarized under Table:
VI-8.
460
Table: VI-8
Analysis For Acceptable WTP (Y2):
Variables Coefficients Standard t- Statistics p-value

Estimates error [Pr(> 111)]
Intercept 28.84633 2.887855 9.988843* 2.68E-14
X, 0.055144 0.03559 1.549416 0.12663
x2 -2.3E-05 0.000176 -0.12967 0.897267
x3 -1.06751 0.688715 -1.55 0.12649
X4 0.33975 0.067317 5.047047* 4.59E-06
X5 -10.9895 1.32084 -8.32011* 1.58E-11
X6 -1.63883 1.563333 -1.0483 0.298778

* Indicates significance of variable at 95% confidence level.
Regression Statistics; Adjusted R2=0.71, Standard Error=4.36 For 66
Observations
ANOVA Results: p -value of F-testi.e. Significance of F =2.78E-15;
degree of freedom for regression= 6; degree of freedom for residuai=59
(Source: Calculatedfrom Survey resultsj
Y2 =28.85 + 0.06X, - (2.30E-05)X2 - 1.07X3 +0.34X4 - 10.99X5 - 1.64X6

(9.988843)* (1.549416) (-0.12967) (-1.55) (5.047047)* (-8.32011)* (-1.0483)
.............................(viii)
As discussed for Yi, three aspects (i.e. adjusted R2, significance of individual partial
regression coefficients and overall significance of model) are required to be observed

from regression analysis. For Acceptable WTP case, the overall significance of model
is found very good as seen from extremely small value of p-value of F-test (2.78E-
15) and adjusted R2 has good value of 71%. But individually, some coefficients have
come out insignificant as evident from their p-value or alternatively checked with
critical t- value at 95% confidence interval with 59 degree of freedom (this is no. of
observations minus no. of variables minus 1). The calculated t- value for Xi, X2, X3
and X« is less than critical t- value of 2.0. Hence, these variables are statistically
insignificant to explain WTP for this set of data. More over, numerical value of partial
461
coefficient P2 is almost zero and hence it is insignificant to explain WTP. Regarding
signs, unexpected negative sign for Xz and X3 is like denial of saving by use of toll
road. The X2 and X3 are indicating total km travelled per month on all roads and per
km cost of running vehicle respectively. The increase in travelling or cost of
travelling can be expected to welcome toll roads if they were perceived beneficial.
Hence, negative sign explains more they travel and more they spend on operating
vehicle, additional burden of tolling is resisted. The signs for other variables are found
as expected.
6.6.63 Regression Analysis for OK WTP (Y3):
variance (ANOVA) technique for OK (Y2) WTP are summarized under Table: VI-9.
Table: VI-9
Analysis for OK WTP (Y3):
Coefficients Estimates Standard error t- Statistics p-value [Pr(> 111)]

Intercept 29.42457 3.659103 8.041471* 4.66E-11
X, 0.02131 0.045095 0.472565 0.638267
x2 -0.00011 0.000223 -0.48461 0.629744
x3 0.243342 0.872647 0.278855 0.781331
X4 0.42836 0.085295 5.022118* 5.03E-06
X5 -8.95528 1.673592 -5.35093* 1.5E-06
-6.39952 1.980847 -3.2307* 0.002021
x6
Regression Statistics: Adjusted R2=0.62, Standard Error=5.52 For 66 Observations
ANOVA Results: p-value of F-testi.e. Significance of F =5.44E-12;
degree of freedom for regression 6; degree of freedom for residual=59
Yj =29.42 + 0.02Xi -O.OOOIX2 +0.24Xj +0.43X, -8.96X5 -6.4OX4
(8.041471)* (0.472565) (-0.48461) (0.278855) (5.022118)* (-5.35093)* (-3.2307)*
............................. (ix)
For OK WTP case, the overall significance of model is found very good as seen from
extremely small value of p-value of F-test (5.44E-12) and adjusted R2 has good value
of 62%. But individually, some coefficients have come out insignificant as evident
from their p-value or alternatively checked with critical t- value at 95% confidence
462
interval with 59 degree of freedom. The calculated t- value for Xi, X2 and X3 is less
than critical t- value of 2.0. Hence, these variables are statistically insignificant to
explain WTP for this set of data. More over, numerical value of partial coefficient (32
is almost zero and hence it is insignificant to explain WTP. Regarding signs,

unexpected negative sign for X2 is like denial of saving by use of toll road as
explained for Y2.
For three different values of Y (i.e, Yi, Y2 and Y3) the independent variables are same
(i.e. Xi to Xg). For three equations as above for Y, adjusted R12 is high and some of
the variables are insignificant and therefore the linear relationship among these
variables is tested through the coefficient of correlation to detect multicollinearity.
The results are given in Appendix - 3. These show that these variables are not highly
related to each other.
6.6.6A Interpretation of Regression Analysis for Car Users:
The statistical analysis of known independent variables for explaining WTP for car
users by means of regression tool provides following findings.
1) Looking to the reasonably good value of adjusted R2 and extremely good
overall significance of regression model for Acceptable and OK level of WTP

in equation (viii) and (ix) respectively, the linear relationship assumption is
found tenable. A couple of independent variables are significantly explaining
WTP and sign for all six independent variables are as expected except for
amount of travel(X2) and cost of travelling (X3). The results for Acceptable
WTP are found statistically more relevant among three levels of WTP.
2) The existence of positive intercept in all levels of WTP is most encouraging
paying tolls that too very near to prevailing toll level of Rs. 30 (Table:VI-10).
The error in estimates of intercept is also found small enough to conclude that
intercept has good acceptance in all respondents. As, expected it increases
with level of WTP changes from most desirable (Yi) to just tolerable (Y3)
level of WTP. The toll resistance is represented from other variables notably
from impact of other taxes (X5) on road sector. The corresponding value of
coefficient (P5) is also large enough to attract attention. This is a major policy
463
implication being under purview of planners of PPP. If the respondents do not
get value for money, coercive taxation can not help to gather Public support
for PPP policy. The negative sign for amount of travel(X2> and cost of
travelling (X3) hint at denial of benefits of tolling. The rationalization of taxes
on the sector, ploughing back more sectoral revenues to the sector etc. are the
measures expected by the respondents.
Table: VI-10
Regression Results of Intercept For WTP (Y1 to Y3):
Coefficients Estimates Standard error
24.15834 3.060573
Intercept For Yi
Intercept For Y2 28.84633 2.887855
Intercept For Y3 29.42457 3.659103

(Source: Summarizedfrom models under Table: VI-7, VI-8 and VI-9)
3) Another major finding is about tolling of a section in full length of known

origin-destination of journey. Even for short distance between Vadodara-
Godhra, almost 50% of stretch is tolled and remaining is free despite
comparable standards. The value of coefficient ($4) is small but the effect of
free stretch is positive as observed for this variable (X4) in all levels. Once the
remaining free leg is imposing new toll without significant improvement of
standards, the WTP for existing toll road is likely to get eroded as revealed
from above analysis. The Halol- Shamlaji stretch is under four lanning from
year 2008-2009 and is likely to collect tolls earliest from year 2010-11. The
tolls payable on this leg of journey is going to affect consumer surplus being
enjoyed by respondents since existing road is already having comparable level
of services. This understanding is leading to Corridor Development approach
where wholesale pricing benefits are availed by interstate traffic and project
cash flow is not only supported from user’s tolls. Another way, the analysis
that a pothole on Halol- Godhra stretch can influence WTP on Vadodara-
Halol Toll road. This is nothing but influence of externalities on remaining leg
464
ofjourney. The planners of PPP shall get a major policy lesson that knowledge
of origin-destination of toll road users shall be made known and as an active
partner of PPP, the service standards of remaining leg (may be tolled or
untolled) shall be ensured to the acceptable level for helping tolling on
existing toll road. This may require additional expenses from Government if
the stretch is maintained by public body. This is the partnership expected from
Government in support of PPP on highways. Hence, this support is felt more
required than prevailing practice of Government share in project cost under
capital grant provision. Any BOT project can attract private funds if the
project is designed with proper toll period and hence capital support to reduce
the project cost may not be only option to support PPP. A combination of toll
road with good supportive infrastructure in remaining length of total journey
can help in maintaining viability of project by attracting traffic on toll road
that is impossible by the toll project economics on standalone basis. The
discussion is actually more concerned with maintaining atleast trafificable
conditions on public roads which are having pathetic riding quality in want of
adequate funds to maintain them. Timely maintenance of free public roads is
bare minimum requirement emerging from above analysis in support of PPP.
4) The substantially insignificant statistical values of total kilometers travelled in
a month (X2) and per km operating cost (X3) are indicative of the feet that
WTP is not bearing any explainable relationship on how much respondent
totally spends on his usage of car per month. Practically the per km cost of
using a car is mainly fuel cost as tabulated under Table: VI-11. Hence,
respondent is aware of the fact that he is paying very less on tolls (it is average
13% of total per km car usage cost of Rs. 3.62). Hence, he may not like to
relate his feel expenses with WTP on a small journey of maximum 70 km
between Vadodara-Halol-Godhra. The frequency of travelling on Vadodara-
Halol Toll road (Xj) is not really mattering for WTP on this line. However, the
frequency for business purpose (X6) is not in favour of WTP as the savings are
not perceived to that extent.
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Table: VI-11
Vehicle Operating Cost For Car Users
Parameter Per km Fuel Per km VOC Per km VOC
expenses excluding toll including toll
payments payments
Mean 2.96 3.15 3.62
Std. deviation 0.74 0.76 0.85
Total samples = 66
(Source: Derived From Survey Results)
6.6.7 Regression Analysis for Explanation Of WTP For Truckers
The independent variables (Xj) are identified as below to explain WTP for Truckers.
Since survey response for WTP of truckers was found as a single value, the WTP
analysis is simplified in this case. The independent variables in this case are as below.
1.0 One Side Frequency Of Trip On Toll Road (Xi):
How often a respondent enters toll road in a specified time interval (here it is per
month) will make him think for his expenditure function seriously. This can affect
WTP positively if respondent has agreed with savings.
2.0 Length of full journey (X2):
The longer is the journey; wider shall be experience of toll versus free roads. Also,
one can expect the respondents to seek safe and comfortable long distance journey at
some price. Hence, truckers are expected to express positive response for WTP on this
variable.
3.0 Per Km Diesel Cost (X3):
Since, the fuel cost is huge in total vehicle operating cost; this cost is separately taken
here. This is characterized by age of vehicle, type of fuel, fuel efficiency,
technological aspects of given truck, type of routes generally taken up for travelling,
behavioural pattern of driver etc. As discussed before, tolls are stated to increase
mileage by 0.5 km per liter and diesel cost constitutes 66% of a typical fare per km.
The benefit of toll road for a truck having fuel efficiency of about 3.5 km per liter sees
rise of 14% in mileage. Hence, respondent spending more on vehicle fuel is likely to
466
react thoughtfully as far as diesel prices are soaring. The expected sign is positive for
relation with WTP.
4.0 Per Km Toll Paid (X4):
This is remaining tangible factor of vehicle operating cost and it represents extent of
tolling encountered by respondent. The trucks serving interstate transport are more
exposed to tolls as compared to car users. If the respondent faces higher tolls per km,
WTP shall be lower. Thus, negative sign is expected in relationship with WTP. This
variable was not considered for car users since the car users were found mostly local
users plying between Vadodara- Halol-Godhra which involved tolling on only
Vadodara- Halol road.
5.0 Percentages OfBadKmlnTotal(Xs):
Assuming that toll roads provide good roads, percentages of bad roads will decide
percentages of hurdles being faced in a journey wherein tolled portion is relief maker.
More the percentage of bad road in total journey, it will wipe off benefits of this toll
road hence one can expect negative sign.
6.0 Average Fare Prevailing Per Km (X6):
The fares for trucking are found not symmetric for both parts of journey. The fare is
also stated to be lower than what were required for comfortable business. The
increasing competition from smaller/ medium size truckers who avail easy finance
and then accept minimum fare to meet with debt repayment terms is quoted as
problem for industry. One example states that Vadodara- Delhi fare was @ Rs. 22,000
per one side trip in 1995 (@diesel price of Rs. 7.0 per liter) which is same in 2006-07
(@diesel price of Rs. 37.0 per liter). Thus reducing fares and increasing operating
costs are stated as concern for this industry. Under such circumstances, the tolling
may not be welcome but more he fare, more could be the WTP. Hence, the expected
sign is positive.
7.0 Perceived Savings On Vadodara -Halol Toll Road (X7):
This variable is straight forward asking for savings perceived due to improved
condition of toll road. The cars can often use free service roads, but trucks are not
467
allowed on service roads and hence the issue is discussed in comparison with other
inferior stretches ofjourney. This variable is expected to carry positive sign.
8.0 Size Of Fleet (Xg):
The numbers of tracks handled by the respondent is a variable expressing influencing

capacity of respondent on market. A positive sign is expected for this variable. The
relevance of this variable is to be tested as actual size of fleet is generally not
responded correctly by the respondents.
9.0 Travel Time of Total Journey (X9):
Since the total journey is expected to be manifold of Vadodara - Halol stretch, the
variable may not hold good relevance but sign is expected to be negative.
10.0 Intercept (p0):
The intercept is to be interpreted as WTP before starting the journey or absolute WTP
without being affected by any independent variables. The existence of non zero value
of intercept and its sign can be useful for understanding WTP per se.
Here, the multiple regression model is assumed to take linear specifications

. incorporating nine independent variables to explain WTP (Y) for truckers as
Yi=p0+PlX1+P2X2+P3X3+P4X4+P5X5+p6X6+p7X7+p8X8+P9X9+Ui
............................. 00
6.6.7.1 Regression Analysis For WTP (Truckers):
variance (ANOVA) technique for mean WTP (Y) are summarized under Table: VI-
12.
468
Table: VI-12
Analysis For Mean WTP (Y):
Coefficients Estimates Standard t- Statistics p-value
error [Pr(> 111)]
Intercept 42.17306 19.54655 2.15757* 0.039094

X, 0.029965 0.05303 0.565055 0.576238
\r 0.007715 0.008501 0.907557 0.371345
A2
-1.84586 1.856584 -0.99422 0.328067
x3
X4 -12.1542 4.771868 -2.54705* 0.016231
X5 -0.05219 0.181645 -0.28734 0.775824
Xs 0.754335 0.848912 0.88859 0.381293
0.632103 0.079748 7.926238* 7.59E-09
x7
X8 -0.03522 0.024218 -1.45411 0.156297
-0.12316 0.110148 -1.11811 0.272395
x9
Regression Statistics; Adjusted R2=0.74, Standard Error=14.08 For 40
Observations
ANOVA Results: p -value of F-test i.e. Significance of F = 2.18E-08;
degree of freedom for regression=9 ; degree of freedom for residual=30
Y=42.17+ 0.03Xi +O.OO8X2-I.85X3 -i2.i5X4-O.O5X5 +0.75X6+0.63X7 -0.03X8 -0.12X9
(2.15)* (0.56) (0.90) (-0.99) (-2.54)* (-0.28) (0.88) (7.92)* (-1.45) (-1.11)
...............................(xi)
As presented in Table: VI-12, the overall significance of model is very good as p-

value of F-test is almost zero(2.18E-08). The adjusted R2=0.74 and thus it explains
74% of variation in WTP with the use of above set of variables. Regarding individual
partial regression coefficients from Xi to X9, for degree of freedom = 30 the critical t-
value for 95% confidence level is 2.042. Hence except X4 and X7, all variables are
found statistically insignificant to explain WTP. This is also seen from respective p-
values for them as except X4 and X7, all variables have p- value in excess of 0.05 (i.e.
5%). As the value of adjusted R2 is high and majority of individual coefficients are
469'
statistically insignificant, the presence of multicollinearity is tested through
coefficient of correlation given in Appendix - 4. As per this, it is found that variables
are not highly related with each other and therefore it can be said that variables X4 and
X7 are important variables affecting WTP.
Regarding signs, the discussions given under subsection 6.6.7 expects negative sign
only in case of (X4), (X5) and (X9). Here, all assumptions for sign under subsection
6.6.7 are coming true except unexpected negative sign for per km diesel cost (X3)
and fleet size (Xg). This reverse sign in these two variables is indicative of denial of
savings due to toll road and hence it is resistance to tolling. The natural occurrence of
negative sign for (X4) , (X5) and (X9) are confirmed in this results. Here, only two
variables namely per km toll paid (X4) and perceive saving on project road (X7) have
turned up statistically significant. Among these two, the notably higher value of
coefficient for (X4) is however indicative of larger impact on WTP due to too many
toll plaza being faced by respondents in their long journeys. Also unlike car users,
standard error in case of intercept and both the effective independent variables (X4
and X7) is found remarkable and hence representative of wide range of response.
6.6.7.2 Interpretation Of Regression Analysis For Truckers:
The statistical analysis of known independent variables for explaining WTP for
truckers by means of regression tool provides following findings.
1) Looking to the reasonable good value of adjusted R12 and extremely good
overall significance of regression model for mean WTP in equation (xi), the
linear relationship assumption is found tenable. Two of the nine independent
variables are significantly explaining WTP and sign for these two independent
variables are as expected.
2) The existence of positive intercept for WTP is most encouraging outcome of
this analysis. It simply means, Vadodara- Halol Toll road is worth paying tolls
though it is far away from prevailing toll level of Rs. 140.0 (Table:VI-12:A).
However the error in estimates of intercept is found large. This low value of
intercept guides to conclude that truckers are not really happy with tolling of
Rs. 140 for 32 km of Vadodara- Halol road. The toll resistance is also
470
represented by unexpected negative sign for per km diesel cost (X3) and size
of fleet (X8).
3) The lower value of coefficient for perceived savings on Vadodara- Halol road
is indicative of ignorance of such savings in total length ofjourney.
4) The lower value of intercept and statistically insignificant seven independent
variables in above analysis is reflection of the discussions held during survey
that truckers view the tolls as an additional tax. The disproportionate toll of
Rs.140 per trip for a truck for merely 32 km of journey on Vadodara- Halol
road (very small portion of total journey e.g. for Vadodara- Delhi it will be
only 3% of total journey) is not capable of generating demand for tolled roads
(“better roads?”) even at intercept level.
5) A major variable of per km diesel cost (X3) was important variable to reflect
WTP with expectation of positive sign. The insignificance of per km diesel
cost (X3) and unexpected negative sign are denial of benefits due to tolling
and it is also attributable to confusion of exact saving of diesel per km on toll
road and question of beneficiary of such saving between owner and driver.
6.7 CONCLUSION
Knowing the fact that success of commercial approach to development of roads is

ultimately linked to the public response to direct tolling operations, willingness to pay
(WTP) is most important factor for any PPP project. The diminishing spending
capacity of Governments is spearheading for attracting private sector participation in
road sector. However, resource crunch expressed by Government is yet to make
impact on road users’ aspirations for free utilization of this commodity. The
concession agreements are allowing tolling on individual road user for funding or
efficiency objectives but user perceives road as a Public Good and that sparks toll
resistance. The willingness to pay among the users is not so elaborate for public
nature of this commodity. The commercial investors under BOT agreement are at the
stake when there is no established tolling culture among the users of facility. The
tolling by private investor on Indian roads is facilitated by Government through
enabling amendments in legislation. But the existing heavy taxation on road sector is
evident and is shadowing the basic tenets of direct tolling. Under such circumstances
road users are viewing the direct tolling as just another tax. The non transparent
471
commercial operations of tolling authorities are annoying users who are interested to
know when the cost recovery will end through tolls.
The planners of PPP projects are taking up toll road projects based on some WTP
surveys conducted by international consultants who ascertain users’ preferences based
on site surveys at approval stage of work. The toll rates are suggested based on
consultant’s assumption of savings in vehicle operating cost and reduction in travel
time. These results are deemed to be valid for foil tenure of concession period.
In this chapter, the public (road users) are directly encountered to know about their
cost economics of vehicle usage on toll roads and preferences on road pricing. A
sample survey for car users and truckers is conducted taking case study of Vadodara-
Halol Toll road. This is a 32 km long four lane State Highway and serves interstate
traffic between Mumbai- Delhi, Vadodara- Indore and Vadodara- Banswada. The
survey results are found useful in estimating mean value of WTP on selected toll road.
Also, linear multiple variable regression is also carried out on WTP using known
response for set of independent variables. The survey results are encouraging and
establishes acceptance of tolling practice on prima facie. Following issues are
emerging from these survey results that requires due attention.
1) The improved condition of road generates consumer surplus and planners

attempt to measure this surplus using available standards for vehicle operating
costs at planning stage of PPP project. But thenafter there is no user’s recourse
in concession agreement to see that users actually realize the consumer surplus
on every day of tolling.
2) Economists/planners are debating for superiority between average cost road
pricing and marginal social cost pricing. But in reality, the road sector is
already heavily taxed and users start paying before putting vehicle on road.
The road sector is providing considerable general revenue to the Government
that is not returning back to the sector. Additionally, fuel cess is imposed as a
means of dedicated funds for development of National Highways and other
road network. Any direct tolling on users above this regime of road pricing is
viewed as another tax and hence generates toll resistance.
3) In principle, tolls are set to allow the private investor to recover his
investments (with some returns, applicable as per type of regulation) justified
472
with calculations of user’s saving in vehicle operating cost and saving in time.
These are generally within ceiling limits specified by the MOSRT&H and the
rates are revised as per fluctuations in Whole Sale Price Index (WPI). In this
mechanism, only users carry onus to repay the investors and large scale
externalities are not covered in pricing policy. These leads to higher toll values
or inordinate concession periods or render many PPP projects unviable at
planning stage itself. The users are annoyed for paying tolls on every
improvement or for maintaining the trafficable conditions. Especially when
tolls are revised annually, users do not see value for this revision as many of
times service standards are lower than earlier after revision of toll. This is
happening because tolls are not linked with actual service standards and users
see no rationale in paying for roads on revised rate.
The findings from response to WTP survey for car users are bringing out many issues
beyond savings on Vadodara-Halol Toll road. These findings are summarized as
below. /
1) The car users were found not ready with perception of savings in VOC or in
coming from Vadodara or Panehmahal district and were thus local people. For
473
them, the total length of journey has improved and that was reflected in above
2) As per regression analysis, looking to the reasonable value of adjusted R2 and
extremely good overall significance of regression model, the linear
3) Statistical analysis proved existence ofpositive and remarkable intercept of
about Rs.24 to Rs.30 considering all level of WTP. This is most encouraging
outcome of this analysis. It simply means, Vadodara- Halol Toll road is
worth paying tolls that too very near to prevailing toll level ofRs. 30.
4) The gap between mean WTP stated by respondents and intercept of regression
5) The WTP is found depending on service standards in full length of journey.
that a pothole on Halol- Godhra stretch can influence WTP on Vadodara-
level for helping tolling on selected toll road. This type of partnership can be
expected from Government in support of PPP on highways. A combination of
toll road with good supportive infrastructure in remaining length of total
journey can help in maintaining viability of project by attracting traffic on toll
road that is impossible by the toll project economics on standalone basis. In
fact this is leading to concept of corridor development tapping externalities for
project revenues and whole selling road facility for longer stretches in benefit
of road users.
474
The findings from response to WTP survey for truckers are also bringing out many
issues beyond savings on Vadodara-Halol Toll road. These findings are summarized
as below.
1) The truckers are found too annoyed with tolling practices on highways. They
trucks is only Rs. 2.17 per km (Rs. 69.44 per one side journey) as compared to
to car users, tolling has now seems accepted by transporters as indispensable
very low i.e. Rs. 1.93 per km (i.e. Rs. 61.76 per one side journey of project
road). Thus truckers perceive benefits of half of toll being paid on project
road and they have expressed WTP for selected toll road even less than half
of prevailing toll rate. The trucks travel far beyond Vadodara- Halol and
hence any positive or negative experience on this 32 km of small stretch has
limited relevance for them. But any positive or negative experience on
remaining huge length has definite impact on WTP for this project. Since road
between Vadodara- Shamlaji borders has only this alone tolled section, the
mean WTP on toll road is infact covering benefits of remaining contiguous
untolled length also. This is evident from the fact that truckers state per km
WTP for full length journey with four lane facility at only Rs.1.14 that is
lower than per km WTP of Rs. 1.93 on Vadodara-Halol road. Thesomeofthe
reasons are common with car users. All of the respondents blamed other taxes
affecting WTP. The heavy fixed and variable cost of owning and driving
track on national or three state permits, tyre renewals, servicing, body work
and very competitive feres on other hand are stated as major hitch to pay this
extra charge. One more intrinsic problem with truckers is stated as, diesel
saving is generally cornered by drivers and maintenance savings is felt
reaching to owners. The overloading and sundries collected for enroute short
distance consignments were told helping many of times. Regarding time
saving, there was no waiting business opportunity at any end stated as a major
factor in underquoting WTP for selected toll road and for frill length
improvement. When business opportunity exists, trucks can not ran at speed of
475
100-120 kilometer per hour and can not travel for more than six hours at a
stretch to take benefits of toll roads. The absorption of tolls in overall business
emerged insignificant too. Overall, the trackers view tolls as an additional tax
roads after paying heaviest tolls.
2) As per regression analysis, looking to the reasonably good value of adjusted
3) Here the intercept of regression model is positive, statistically significant but
not remarkable (Rs. 42) as compared to prevailing toll level of Rs.140 for
selected category of three axle track. This is only Rs.1.31 per km as compared
destination is one of the solutions to this. At broad policy level,
rationalization of taxes on road sector and tapping externalities for project
revenues are also worth applying measures to address to this issue of lower
WTPfor trucks.
476
In a nutshell, WTP estimates need to take into account many factors beyond project
benefits and time to time review of actual benefits from the project and from
remaining leg of journey is required to sort out problems with users’ recourse.
Alternatively for a given WTP or for given estimate of quantum of benefits accruing
to users due to improvement, the size of project and stages of investment shall be
checked back since the project cost along with traffic volume are directly deciding
the toll levels at present and viability gap shall be adjusted from other sources
(externalities).
477
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or Common Pools? - a manuscript from Florida State University
(gamet.acns.fsu.edu/~bbenson/hywys.doc accessed dated 16-3-07)
Block, Walter (1983): Public Goods And Externalities: The Case Of Roads
Journal Of Libertarian Studies, Vol.VII,No.l (Spring 1983) From The Fraser
Institute, Vancouver (mises.org/joumals/jls/7_l/7_l_l.pdf accessed on net on date 16-3-
07)
Dr. Emmerink, Richard H. M. (1998): Information and Pricing in Road

Transportation Free University, Netherlands Chapter-3 page 46-47
Field, Barry C. (2001): Natural Resource Economics- An Introduction Me Graw

Hill Publication
Glaister, Stephen (1981): Fundamental of Transport Economics, Basil Blackwell-

Oxford Publication
Gujarati, Damodar (1995) : Basic Econometrics McGraw Hill Book Co. (Singapore)
Third Edition
Heggie, Ian G. (1972): Transport Engineering Economics McGraw Hill Book Co.
(UK) Ltd.
World Bank (2004): India Financing Highways World Bank document report no.:
30363 - in energy and infrastructure sector unit (South Asia)
IRC Special Publication SP-19 (2001): Manual for Survey, Investigation and
Preparation of Road Projects Government of India (First Revision)
IRC Special Publication SP-30(1993): Manual On Economic Evaluation Of

Highway Projects In India: Government of India (First Revision)
478
Lindsey, Robin (2006) Do Economists Reach A Conclusion on Road Pricing? The
Intellectual History of an Idea Econ Journal Watch, Volume 3, Number 2, (May)
pp 292-379
(financecommission.dot.gov/.../Background%20Documents/Lindsey%20DoEconomists%20
ROC%20on%20road%20pricing.pdf accessed through Google on net on date 21-3-07)
Kolstad, Charles D. (2000): Environmental Economics New York Oxford, Oxford

University Press.
Perman, Roger; Yue MA; McGilvray, James and Common, Michael (1999): Natural
Resource And Environmental Economics: Second Edition Longman Publishers
(UK)
Wang, Hua; Laplante, Benoit; Wu, Xun; Meisner, Craig (2005): Estimating
Willingness to pay with random valuation models: An application to Lake
Sevan, Armenia. World Bank Working Paper 3367 (August)
479
CHAPTER-VII
CONCLUSIONS AND SUGGESTIONS
7.1 CONCLUSIONS AND SUGGESTIONS
7.2 SUGGESTION FOR MORE ACCOUNTABLE AND FLEXIBLE

480
CHAPTER-VII
CONCLUSIONS AND SUGGESTIONS
7.1 CONCLUSIONS AND SUGGESTIONS
This chapter presents summary and conclusions of the preceding Chapters, the major
findings of present research and recommendations with policy implications. As
frequently emphasized in this study, the Private Sector Participation (PSP) for
development of roads is practiced in varying terms of outsourcing one or more aspects
of road project. Since technical inputs are very much in competence of Government
engineers, owing to the incapability of exchequer it is the financing that is aimed
under PSP. This subset of PSP wherein private sector is invited to share the
investments and returns on public roads are called Public Private Partnership (PPP)
has attracted attention of Governments worldwide. As far as Indian scenario is
concerned, huge investment of Rs. 87,000 crores is anticipated from private sector
through PPP route for development of NH segment under ambitious NHDP during
Eleventh Five Year Plan. This is unprecedented and is almost three times of actual
total expenditure on NHDP during Tenth Five Year Plan including all sources. This
study has brought out issues with framing of NHDP, its specialist implementing
agency (i.e. NHAI) and its delivery system. The study has also pointed out project
level issues of PPP route. The issues of public acceptance of tolling operations raises
many issues related to regulation of public utilities under natural monopoly
conditions. The study is made to gather the planning and management issues in
undertaking PSP in general and PPP in specific. Hence, the conclusions presented
under Chapter -IV are covering issues related to Planning of policy for PSP while
taking up NHDP project and formulation of projects under the constitution of Model
Concession Agreement. The Chapter -V and Chapter -VI are covering issues related
to managing the toll projects at operational stage- like project viability in terms of
traffic worthiness and financial operation of various sources of funds and revenues
collected from project operations; problems in dealing with local traffic; inability of
rigid concession agreements to cope up with the changing project specific conditions;
Willingness To Pay for tolled facility of improved. standards in lieu of earlier
substandard free facility. However, the roots of management issues were found under
planning (formulation) of projects and solutions to management issues were observed
481
in planning appropriately new projects with flexible provisions. Hence, planning and
management issues are found often intermingling in these Chapters. In a broader
sense, Chapter- IV is basically presenting planning issues and Chapter- V and VI are
pertaining to management issues except specified. The remaining Chapters (i.e,
Chapter-II and III) are findings from international experience that is useful for
planning of private sector participation for development of roads in India. The
Chapterwise findings/conclusions and suggestions/policy implication are presented
below.
The review of literature presented under Chapter-II encompasses historical

background and recent trends in private sector participation through international
literature. In the literature, the Indian perspective of development of highways is
found mainly concentrated on development of National Highways through NHDP.
The review of literature has imparted following observations/findings.
initiative which saw demise on the eve of nationalization of roads. The present
inclination towards private sector participation is a part of pendulum swing
between public and private provision of public utilities. The diminishing
financial capability of Governments (including US) has brought back private
sector participation in development of roads world over. But present
investment needs in road sector are unprecedented and two important aspects
of PPP namely viability of private investment projects and public acceptance
of road pricing are most important for planning and managing such projects.
The externalities associated with roads create many issues in regulating private
provision of this public utility.
2. The bitterest feet to be concluded from review of UK and US experience of
private initiative for roads development is that any state administration can be
safely assumed to be strongest competitor with coercive power and if not
satisfied, can cause demise of PSP. The present red carpet welcome from
Government needs careful interaction while dealing on public utilities like
roads. Similarly, improper and inadequate awarding process of long term
482
private sector participation is warned by economists for monopolistic
exploitation of users which requires balancing of viability of private
investment and safe guarding of user’s interest.
3. The PPP for any road project is long term investment made by a private
investor assuming certain risks under given set of conditions of agreement
(representing role of government) and since the returns are directly linked to
road users, the interface with public (representing role of public) forms very
important third dimension of this process. A basic requirement for a successful
toll road project is that it should attract sufficient traffic (establishing traffic
worthiness) so that project benefits will exceed project costs. But the traffic
for the future is never projected reasonably and hence all three pillars of PPP
i.e. private sector, sovereign and users suffer in such projects.
4. The uncertainties attached to the long term concessions of public utilities
attract high rate of renegotiations as compared to cancellations. The
Government also initiates such renegotiations but in all the cases the
concessionaires generally snatch good financial benefits.
nation wide programme is discouraging and suggests limited scope (about 10
% of total investment in important network) for privately financed toll roads.
6. . The market based economy like US has notably followed public provision in
implementing mega project of Interstate Highways. But the recent
privatization trend in US is sudden shift wherein State assets are being sold
(leased on very long term basis e.g. 99-year lease of the Chicago Skyway for
$1.83 billion payment to Government) to multinational investor firms and
States are gamering windfall gains from proceeds. These types of sales are
opening Pandora’s Box when roads are being viewed as commercial goods
instead of lumpy investments.
7. The anticipated mega level private sector participation under the lovely term
“Public-Private Partnership (PPP) ” for development of highways specifically
by Central Government of India (including NHAI) is very much in
congruence with international thrust for similar action in respective countries
(including affluent nations) which is perhaps late in this country.
483
The conceptual understanding of traditional delivery system of roads and changed
delivery system under PPP are covered under Chapter -ID. Since awarding of
concessions for providing public utilities is pioneered by European countries,
European experience of concession in road sector alongwith other nationwide
programmes undertaken by some countries are covered under this Chapter. The
international experience gathered in this Chapter suggests that commercial approach
embedded under PPP approach restricts its application to superior roads which are
generally 10% to 20% of total road network of any country. Worldover, the PPP
approach has yet not generated much enthusiasm and specifically Europe (the main
promoter of awarding concession of public utility to private sector) is found opting for
many innovations in public administered contracts of roadwork instead of PPP.
Regarding concessions for maintaining the already built roads, Europe is found
applying performance based approach and many European countries are found
awarding concessions preferably to Public bodies. In Europe, often public bodies are
found managing long term debts from markets to cater to long gestation period of
upfront investment needed for road projects. The present Indian thrust for PPP is
tantamount to award of concessions under BOOT/BOT type of agreement. In fact
many countries worldover have applied their public agencies under some ambitious
road development programme but PPP under BOT/BTO/DBFO contract forms have
not really emerged as a panacea to meet the investment needs. However, Mexican
experience for massive construction of toll roads under PPP route has noteworthy
relevance with ongoing NHDP in India. The conclusions arrived at from study of
various forms of PSP (Chapter-Ill), conceptual understanding of PPP through
concession awards and international experience thereof, are discussed as below.
8. Under PSP, Government is assigning wider role to private sector including

financing of project cost which is termed as PPP. Due to PSP, role of
Government bodies handling road sector is getting thinner as it is basically
outsourcing some or all of the functions of Government. The PPP is subset of
PSP and it is very different paradigm of delivery system. Under PPP, it
requires handing over the public assets to the private investors for many years
during and after construction in terms of award of concession. The operation
of concession is different than regular civil engineering job. Here, the private
sector has to take care of optimum design, cost control and timely completion
4S4
of project and most importantly traffic adequacy (demand side) for
commercial success of project. Due to financial convenience of Government,
PPP is heavily emphasized but its commercial requirements renders it limited
to commercially important routes. Hence, other forms of PPP which need not
involve private investment for long term shall remain usefol for development
of sector.
9. Looking to the diminishing financial capacity of Government bodies,
worldover the importance of PPP route is evident for inviting private
investment in this sector. But PPP route involves transfer of asset to private
investor whereby the public interest for economic development is served by
allowing private interest to earn from users of this public asset. Here, many
countries differ and hence all countries do not adopt BOOT/BOT type of
projects, rather they rely on public administration of projects by setting up
such public toll road companies. However the argument for efficiency and
innovations inspire many countries to opt for private toll road companies
through PPP route. Under any case, the viability concern of such toll road
companies requires regulations. The famous economist Alfred Marshall had
stressed on price or the quality of the services , or both, rather than on the
traditional criterion of minimum cost to Government. The international
experience suggests that such regulations are aimed at protecting viability of
such projects at minimum cost to Government how ever; some European
countries are adopting value pricing that emphasizes service standards in
adopting PSP.
operate public utilities and it has imparted many innovations in other than PPP
predetermined civil work, focusing on performance standards; the long term
It is like zeal to allow contractors to work out better solutions than traditional
State provisions and achieving reduction in operating cost of Government
485
body. The international experience suggests thin structure of Government
body looking to their reduced role. But above suggested innovations require
considerable expertise to draft the specifications wisely so that PSP does not
turn out to be opportunistic event for contractors. As noted in this chapter,
even most developed nation like US are also found far lagging in adopting
such innovations. India is also away from such innovations but outsourcing of
design, bid preparation, quality related aspects and supervision are allowed
atleast for NH works. The above said innovations are likely to be absorbed in
Indian practice due to more and more international consultants getting
involved in big projects on NH and SH. However, the outsourcing of all
activities including core engineering functions in India is suggested to be
taken up with due care. In a wide country like India, any loss in engineering
capacity among Government engineers due to continued outsourcing clubbed
with thinning of strength of public bodies can mean fixture generations of
Government engineers not even capable of evaluating outsourcing proposals.
Hence, it is strongly suggested that outsourcing of core engineering functions
shall not lead to loss of engineering capabilities in Government engineers over
period of time. Hence, outsourcing and Government way of execution shall
co-exist side by side which may be competitive. The Indian problem with
consultancy network is, roads are traditionally built by Government engineers
and hence private consultants have never been exposed to overall modalities
of road project. Hence, the private consultants are yet unripe to take up
outsourcing of road engineering on own capacity.
486
options and it is well managed by UK. The public investment in UK is any
way routed through outsourcing based PSP.
utilities. These are indicative of design of rigid and incomplete agreements.
The most striking part of renegotiations and also award of concessions seem to
be concern for commercial viability of private investments made in public
PPP format being used by NHAI. The apathy for reliable traffic count and
features like Administration Trust for proper accounting of construction
and maintenance) are the strongholds of new approach to toll roads in Mexico
and are worth admitting in Indian NHDP. This type of financial discipline is
recognized by investment rating companies by awarding AAA (i.e. world
class) ratings to such projects. The refinancing of such projects during
operation stage is practiced by private players which breaks lumpiness of such
investments in marketable lots.
tolling operations. The major aspect is, instead of BOT type of PPP project,
State supports major initial investment that is subsequently recovered through
proceeds of initial public offer or securitization. The public support to
investment through stock market is good concept to secure public acceptance
of toll operations.
487
The sectoral overview of roads and qualitative aspects of NH segment is overviewed
under Chapter-IV. NH being trend setter for policy reforms, ongoing NHDP is studied
in this Chapter for its formulation, actual implementation, role of NHAI and its
delivery system.
Following conclusions are made from study of Indian scenario of development of NH

segment.
found of village road standards. The commercial importance of NH in overall
economy has compelled planners to upgrade NH stock mainly through four
lanning works under special programme namely NHDP.
18. Despite rhetoric support to PPP route, NHAI has not really realized more than
10% of private sector investment in recently completed Golden Quadrilateral
(GQ) under Phase-I. The GQ is the only portion completed by NHAI under
NHDP so far in last eight years. This private investment has been found on
piecemeal basis (like Spain and Mexico) where commercial viability was
evident and hence, there is faster development on busy corridor like National
Highway No.-8 (Delhi- Mumbai corridor). But on such busy corridor also,
development has been on piecemeal basis. The most striking fact is famous
Golden Quadrilateral network under the Phase-I took more than double time
for completion with substantial cost overrun. The GQ was to be implemented
under established and favourable conditions whereas now Phase-II is to be
implemented under greenfield conditions. Despite slow progress in Phase-I
and II, the original scope of 14234 km under Phase-I and II is expanded to
51834 km that is almost four times expansion of NHDP. The expansion of
NHDP is not to cost Government much as all these added works are declared
to be taken up on BOT basis. The new targeted year of NHDP is 2015 which
488
is found unrealistic as analyzed based on progress so far. Also, the chances of
realizing so many works on BOT basis are dim in want of existence of
financial framework and Working Group of Eleventh Plan itself suggest scope
for cash contract type of execution that was employed by NHAI in last eight
years.
19. The private sector participation in PPP form is asserted by Government by
amending NH Act in 1995 for allowing concession to any person. The
highway financing is basically matter of matching financial terms for the long
term gestation period of heavy upfront capital investments with steady current
receipts from user charges which may be backed up by budgetary support like
grant to the BOT operator or cess and other budgetary allocations if NHAI or
any public agency invites financing. The Task Force on infrastructure (1998)
had anticipated financing of NHDP based on access to long term institutional
finance like commercial banks, insurance and provident funds which were
supposed to have matching terms of repayment with road project and were in
need of stable source of returns for long time. The repayment to such
institution was estimated to come from cess and other user charges (including
tolls) and in this concept the private sector equity was estimated only around
10%. In reality, no such leverage is enabled either by NHAI or using PPP
route through private investors. So far the users charges collected on current
receipt basis are directly employed to pay the capital expenditure of
contractors under cash contracts. This mechanism has not produced sufficient
output where deficient executive capacity of NHAI has also played major role.
Since the production of tollable four lane got slow, it directly affected the
inflow of toll income and hence the current receipt under cess got under
severe pressure to see the cess reaching level of Rs. 2.0 per liter of petrol and
diesel from Re. 1.0 within first eight years of NHDP. In fact NHAI managed
to raise long term debts in terms of capital gain bonds but funds were found
mismanaged since the actual progress could not absorb these funds on capital
account.
20. Since borrowing for NHDP is like Sovereign debt (owing to outright
guarantee by GOI) and hence GOI has limited extent of borrowing to the
extent of anticipated current receipts from users charges (cess, tolls etc.) and it
is expected that private sector shall invest own equity and debt funds under
489
BOT projects from NHDP Phase III onwards for next eight years that is upto
year 2015. Now also, going through various reports on NHDP, Government is
not found committed to sheer BOT model and public financing of NHDP in
terms of cash contracts is felt going to be mainstay for NHAI.
21. If the concept of Task Force(1998) is extended, a supportive financial market
for financing and refinancing of such investment leveraged on current receipts
of project is required (like primary and secondary mortgage markets in
housing loans) irrespective of type of player involved i.e. public player like
companies to tap long term resources (e.g. Insurance and Provident Funds)
with the help of GOI based on leverage on project revenues (and cess support).
For example France has done this and divested public investment at proper
stage from such toll companies. The pooling of NHDP inflow at national or
such large scale can help in ascertaining financial viability of long term
finance gathered from financial institutions. Otherwise scattered type of
present PPP will be limited to attractive stretches and are susceptible to
viability concern (as found in case of Mexico and Spain). Alternatively, large
private consortium if handles many stretches bundled from viability
perspective, the overall spread of PPP may get penetration into greenfield
conditions. This level of private financing of highways may require foreign
investment which was arranged by China by linking the PPP projects to capital
market. All these mean, basically creation of proper financial market which
was contemplated by Task Force (1998) in the terms of operation of IDFC is
yet unattended by Government and it needs priority. Otherwise, the present
scenario is limited to awarding concession for attractive stretches on Build-
Operate -Transfer basis and NHAI awarding cash contracts to the maximum
extent possible under given public resources.
490
traditional players like State PWDs. If the supervision is to be outsourced then
23. In fact whole approach to NHDP tends not to expose the field to the market at
larger scale. The PPP route envisaged through MCA is an attempt to regulate
the natural monopoly conferred upon to BOT concessionaire to control
superfluous profits but it has no jurisdiction to foster PPP by linking the
project with market. The MCA provides grant support in BOT projects and
calls it leveraging over public funds (in terms of grant support) to attract
private investments on project basis. But even at project level, leveraging on
private equity funds or toll revenue to facilitate cheaper debt resources is not
attended in this MCA. Hence, the approach for PPP is a piecemeal approach
that can not meet expected investments under NHDP. If the NHDP is going to
depend upon budgetary allocations like public financing, the sustainability of
NHDP and NHAI is vulnerable. The tenure of NHDP so far is envisaged to be
only fifteen years which is very short as compared to US and China who
required two decades or more to construct the system of superior roads.
Hence, NHDP can be taken up cautiously applying corridor approach or
package of many routes so that field on wider scale is exposed to market
forces and competition for field is materialized in case of natural monopoly
conditions.
partner in this process who can carry lessons to their jurisdiction of remaining
State level (for State roads), NHAI shall atleast involve State PWDs in their
25. The steps taken by Government in terms of implementation of MCA and
provision of priority route of investment approval are aimed in facilitating PPP
491
but as seen in relevant subsections, they are not focused to large scale private
sector participation.
26. Present delivery system under non PPP route is also not efficient and need
project level careful estimation and design of projects through responsible
consultants if outsourcing is opted for. The modus operandi of NHAI under
outsourcing based approach has worse problems as compared to State PWDs
since the present consultancy firms are not really found working satisfactorily.
The duress component is still maintained in non PPP mode of execution as
evident from analysis of delivery system. It is hereby suggested that the
consultants shall be made responsible in their performance for effective
outcome in non PPP route which is necessitated from evaluation of their
performance by CAG auditors. A system of retention money for atleast five
years or lien on remunerations of consultants from other projects shall be
embedded in contracts with consultants so that financial penalties can be
imposed and realized even after completion of project.
27. At project level, an attempt is made by Government to make PPP more viable
based on provisions of MCA e.g. staggering the investment for six lanning
with a gap of around ten years, State support agreements for not creating
competing routes, acceptance of subsistence level of revenue and availability
of shortfall loans, traffic guarantee for traffic volume on a decided point of
time in the concession period, availability of capital grant up to 40%of project
cost to meet construction and O &M cost etc. but user’s recourse is missed as
was asserted by Alfred Marshall. More over, the partial traffic guarantee
embedded in MCA is risky to rely upon by lenders since it is merely assuring
traffic as per predecided growth rate on specified point of time and
compensation is not in cash but converted in to further extension of liability by
extending the concession period. The Mexican experience of first wave of toll
roads alarms lenders for not to overlook own assessment of traffic worthiness
of individual projects and suggests adequate evaluation of financial case
prepared by concessionaire instead of relying upon Government support.
28. As per MCA, bidding is based on least cost to Government, under given fixed
concession period and fixed toll rates. Hence the concessionaire now faces
not only price capping but also faces to some extent revenue capping which
are regulations embedded to control superfluous profit from BOT operations.
492
But in case of lower traffic conditions, the MCA only offers shortfall loans
under unattractive stipulations. The stipulated traffic guarantee is not really
compensation as it is converted in to extension of concession period which
could ultimately mean winner’s curse. Hence, in absence of any guarantee on
returns, the risky and complicated nature of BOT format embedded in MCA is
not going to lure the private investors despite cost sharing provisions.
The actual implementation of PPP projects under regulatory framework provided in

concession agreement is studied (Chapter-V) taking case studies for viability and user
perspectives. There are four case studies selected in this research work. Two of them
are on National Highways and are part of NHDP. The remaining two are on lower
hierarchy of road that is State Highways. The NH projects are awarded under Price
Cap regulation whereas remaining two projects are regulated by Rate of Return
regulation. In general, all these four case studies are awarded to respective
concessionaires to build and operate the facility under natural monopolistic conditions
by virtue of signing concession agreement by public (i.e. Government) and private
(i.e. Concessionaire) parties. The concession agreements for both NH cases are in
BOT format whereas it is in BOOT format for remaining two cases. The conclusions
of these case studies are as below.
29. The BOT projects are only a decade old concept in India which cover many
aspects beyond traditional cash contract projects. However, planning and
designing of concession agreements have been on line of construction
agreements only. Except recent provision for partial traffic guarantee in MCA,
the very important aspect of traffic is most neglected by planners so far.
Hence, neither reliable past records are committed by Government or future
traffic is forecasted by Government as a commitment. Despite roads being
public asset and traffic being outcome of economic policies of Government,
Government asks bidder of BOT project to ascertain present and future traffic.
All the four case studies suggest that traffic after the starting of toll operations
hold the key for success of BOT projects. Since remaining aspects being
mainly related to construction, the concessionaire being mostly construction
firm, other aspects are generally not influencing outcome of BOT projects.
493
award stage.
32. The claims arisen due to issue of local traffic in Chalthan ROB emphasized
requirement of accounting and monitoring of actual project cost and actual toll
revenues though it was a price capped BOT project. Even recent MCA has not
given importance to these issues with an understanding that it is all related to
profitability of concessionaire and hence Is not of public concern. These
viability concern under Rate of Return regulation which are in fact concession
agreements with multiple securities to investors. Both the cases are having
little variation over typical Rate of Return regulation as here tolls can not be
hiked to match the agreed returns. Here, the returns are secured and deficit in
returns are added in to outstanding project cost rendering these projects to last
for many years beyond their stipulated concession period. Hence, the comer
stones for these cases are identified as- Projects Cost; Traffic Volume and
Tolling Terms. Hence in such projects all three aspects are monitored
seriously with the help of independent consultants.
34. The most striking planning issue in formulating these two projects is,
avoidance of open competition for the field. Since competition in the field in
494
road sector is not advisable, efficient concession can be awarded only through
competition for the field. In both cases, it is unsolicited proposals being
awarded the field and two diverging representatives of public (i.e.
Government) and private concern (i.e. IL&FS) are made partner of
commercial interest in project. This is most debatable partnership where
private concern is most likely to overshadow the public concern in terms of
increasing toll rates beyond inflationary limits and no user’s recourse in case
of reduced service standards. On the other hand, IL&FS played multiple roles
of- Sponsor, Concessionaire, and to certain extent lenders. The worries of
Demsetz in regulating public utilities are relevant in these cases where Alfred
Marshall’s proposal to focus prices and service standards is ignored for
avoiding public investment.
from doldrums conditions. However, Government could not extract any
37. In both cases, users are charged excessive tolls by annual increments (beyond
inflation based formulae provided in agreement) just to reduce the deficit in
return. The benefits to users are however never compared with tolls being
levied during operation period.
38. Due to assured returns, Government carries most of the risk in both the cases.
Both the cases in fact carry explicit Government guarantee for debts raised and
hence basically all funds are attracted on Sovereign eligibility. Thus essence of
PPP is not served. Though both cases started with modest 30% of equity, the
operating losses forced the owners to infuse more equity within operation of
around five years to the tune of 50% or more and thus it was failure of
financial plan to model a replicable PPP project on pioneer basis.
39. As far as planning of NOIDA toll bridge is concerned, the concession
agreement provided project support from commercial use of marketable
project land (BOOT agreement). But the concessionaire company preferred to
495
speculate by holding the prime land and the viability concern was passed on to
the users in terms of toll increase and compounding deficit with outstanding
project cost.
40. As far as planning of Vadodara- Halol project is concerned, the agreement has
provided only four lane facility whereas the stretch is functioning as a
interstate highway between Vadodara- Delhi, Vadodara- Indore and
Vadodara- Banswada. Hence, the future problem with this limited capacity of
project road is going to hamper project economics. This fact is well
understood in framing MCA where concession automatically terminates on
attaining design capacity of traffic and there as inbuilt capacity augmentation
provision.
in public interest and hence both the agreements shall be terminated
the chance of re-awarding the concession for both the cases when these
projects underwent financial restructuring. Academic exercise of estimating
NPV of future cash flow suggests that it is possible to terminate both the
project agreements and pay back concessionaire from proceeds of awarding
regulation. The academic exercise presented in both the cases are flexible to
attain required benefits by adjusting concession period and this suggestion is
felt practical since both the cases have already gone through Ramp Up period
and operate under stable cash flow.
42. The case study of Narmada bridge is NH project with Price Cap regulation.
This project also reveals occurrence of Ramp Up period during initial years of
operation. It is a case of proven traffic eligible for four lanning even then
traffic was found short felling to concessionaire’s estimates. Thus due to
overestimation of traffic and huge debt servicing cost as compared to toll
income, occurrence of Ramp Up period seems generic for toll projects.
496
reserve for maintenance shall be ensured or appropriate designing of project
specific financial base case is suggested to mitigate the viability problem. The
43. The salient feature of Narmada bridge case study is planning issue of tolling
the existing bridge under the concession awarded for construction of adjoining
44. Another planning issue of Narmada case study which is in need of
renegotiation or re-awarding is non availability of category of Multi-axle
vehicles and tolling of them at the rate of six wheel trucks. NICE has claimed
that introduction often wheel trucks and multi-axle vehicles have reduced the
total population of vehicles under the category of trucks. The issue is pending
with Steering Group but such issues are most relevant when technology
changes fast and nomenclature used in agreement affects the viability of
project. The problem with Price Cap based concession agreement used for
NICE or even MCA is ignorance of financial aspects of project. It affects the
viability of project when renegotiation becomes impossible in want of
agreeable past financial data that is never monitored by Government. All such
operational and management problems surfacing due to flaws in planning or
changing perspective hints at constitution of flexible agreement that is only
497
possible if returns demanded in the bid at award stage are evaluated at bidding
stage and are monitored during operations which are missing for Price Cap
regulation cases.
each year, shortage of coins for collecting odd figure fees, toll evasion due to
46. The concessionaire (NICE) has also restructured the loans to overcome
problems with Ramp Up period. NICE has started with 45% of equity and
then offloaded some of them by inviting other financial institution. Hence on
own capacity, it has managed financial aspect during Ramp Up period without
Sovereign guarantees. NICE could not raise toll rates as per agreement but
managed to survive with out passing cost over to the users unlike IL&FS
cases.
47. The relevance of Steering Group in resolving claims of NICE is felt
discouraging as the revenue loss due to riots in 2002 is yet to be attended by
them. Like MCA (2006), concession agreement for NICE also does not
provide formulae to calculate extension of concession period and hence
decision of Steering Group can be a source of litigation for concessionaire.
concession.
The Chapter-VI is covering user’s perspective which is studied through conducting

Willingness to pay survey for two representative classes of vehicles namely cars and
trucks. The study of user’s perspective reveals many aspects which are not addressed
498
to even in latest MCA. Basically, users are found with no recourse after paying tolls
in addition to huge taxes prevailing on owning and running a vehicle. The users are
found perceiving tolls as just another tax under coercive capacity of Sovereign since
the benefits claimed by planners of toll project are mostly denied by the users. The
survey however reveals that it does not mean that users are not willing to pay tolls.
The non transparent commercial operations of tolling authorities are annoying users
who are interested to know when the cost recovery will end through tolls. The
conclusion is leading to opt for larger projects so that benefits claimed by planners on
piecemeal project are not denied. Hence WTP needs attention beyond project
economics of piecemeal project.
49. The improved condition of road generates consumer surplus and planners
attempt to measure this surplus using available standards for vehicle operating
costs at planning stage of PPP project. But thenafter there is no user’s recourse
in concession agreement to see that users actually realize the consumer surplus
on every day of tolling.
50. Economists/planners are debating for superiority between average cost road
pricing and marginal social cost pricing. But in reality, the road sector is
already heavily taxed and users start paying before putting vehicle on road.
The road sector is providing considerable general revenue to the Government
that is not returning back to the sector. Additionally, fuel cess is imposed as a
means of dedicated funds for development of National Highways and other
road network. Any direct tolling on users above this regime of road pricing is
viewed as another tax and hence generates toll resistance.
51. In principle, tolls are set to allow the private investor to recover his
investments (with some returns, applicable as per type of regulation) justified
with calculations of user’s saving in vehicle operating cost and saving in time.
These are generally within ceiling limits specified by the MOSRT&H and the
rates are revised as per fluctuations in Whole Sale Price Index (WPI). In this
mechanism, only users carry onus to repay the investors and large scale
externalities are not covered in pricing policy. These leads to higher toll values
or inordinate concession periods or render many PPP projects unviable at
planning stage itself. The users are annoyed for paying tolls on every
improvement or for maintaining the trafficable conditions. Especially when
499
tolls are revised annually, users do not see value for this revision as many of
times service standards are lower than earlier after revision of toll. This is
happening because tolls are not linked with actual service standards and users
see no rationale in paying for roads on revised rate.
The findings from response to WTP survey (Chapter-VI) for car users are bringing
out many issues beyond savings on Vadodara-Halol Toll road. These findings are
summarized as below.
52. The car users were found not ready with perception of savings in VOC or in
coming from Vadodara or Panchmahal district and were thus local people. For
them, the total length ofjourney has improved and that was reflected in above
53. As per regression analysis for cars, looking to the reasonable value of adjusted
500
relationship assumption is found tenable. Thus, the WTP has ve^ simple
relationship with independent variables. \
54. Statistical analysis proved existence of positive and remarkable intercept of
about Rs. 24 to Rs. 30 considering all level of WTP. This is most encouraging
paying tolls that too very near to prevailing toll level of Rs. 30.
55. The gap between mean WTP stated by respondents and intercept of regression
56. The WTP is found depending on service standards in full length of journey.
that a pothole on Halol - Godhra stretch can influence WTP on Vadodara-
level for helping tolling on selected toll road. This type of partnership can be
expected from Government in support of PPP on highways. A combination of
toll road with good supportive infrastructure in remaining length of total
journey can help in maintaining viability of project by attracting traffic on toll
road that is impossible by the toll project economics on standalone basis. In
fact this is leading to concept of corridor development tapping externalities for
project revenues and whole selling road facility for longer stretches in benefit
of road users.
The findings from response to WTP survey for truckers are also bringing out many
issues beyond savings on Vadodara-Halol Toll road. These findings are summarized
as below.
57. The truckers are found too annoyed with tolling practices on highways. They
trucks is only Rs, 2.17 per km (Rs. 69.44 per one side journey) as compared to
to car users, tolling seems to be accepted by transporters as indispensable
very low i.e. Rs. 1,93 per km (i.e. Rs. 61.76 per one side journey of project
road). Thus truckers perceive benefits of half of toll being paid on project road
and they have expressed WTP for selected toll road even less than half of
prevailing toll rate. The trucks travel far beyond Vadodara- Halol and hence
any positive or negative experience on this 32 km of small stretch has limited
relevance for them. But any positive or negative experience on remaining huge
length has definite impact on WTP for this project. Since road between
Vadodara- Shamlaji borders has only this alone tolled section, the mean WTP
on toll road is infact covering benefits of remaining contiguous untoiled length
also. This is evident from the fact that truckers state per km WTP for frill
length journey with four lane facility at only Rs.1.14 that is lower than per km
WTP of Rs.1.93 on Vadodara- Halol road. The some of the reasons are
common with car users. All of the respondents blamed other taxes affecting
WTP. The heavy fixed and variable cost of owning and driving truck on
national or three state permits, tyre renewals, servicing, body work and very
competitive fares on other hand are stated as major hitch to pay this extra
charge. One more intrinsic problem with truckers is stated as, diesel saving is
generally cornered by drivers and maintenance sayings is felt reaching to
owners. The overloading and sundries collected for enroute short distance
consignments were told helping many of times. Regarding time saving, there
was no waiting business opportunity at any end stated as a major factor in
underquoting WTP for selected toll road and for full length improvement.
When business opportunity exists, trucks can not run at speed of 100-120
kilometer per hour and can not travel for more than six hours at a stretch to
take benefits of toll roads. The absorption of tolls in overall business
emerged insignificant too. Overall, the truckers view tolls as an additional tax
502
roads after paying heaviest tolls. ,
58. As per regression analysis, looking to the reasonably good value of adjusted
59. Here the intercept of regression model is positive, statistically significant but
not remarkable (Rs.42) as compared to prevailing toll level of Rs.140 for
selected category of three axle truck. This is only Rs. 1.31 per km as compared
destination is one of the solutions to this. At broad policy level, rationalization
of taxes on road sector and tapping externalities for project revenues are also
worth applying measures to address to this issue of lower WTP for trucks.
60. The WTP estimates thus need to take into account many factors beyond
project benefits. It requires time to time review of actual benefits from the
project and from remaining leg of journey to sort out problems with users’
recourse. Alternatively for a given WTP or for given estimate of quantum of
benefits accruing to users due to improvement, the size of project and stages of
investment shall be checked back since the project cost along with traffic
volume are directly deciding the toll levels at present and viability gap shall
be adjusted from other sources (externalities).
503
7.2 SUGGESTION FOR MORE ACCOUNTABLE AND FLEXIBLE
The Chapterwise conclusions and suggestions could be effectively extracted to

suggest that the regulating of public utility like roads is in need of a flexible
concession agreement that can rectify flaws observed in ongoing agreement and
accommodate development of changing perspective. The NH segment and hence
remaining segments of road sector are practicing Price Cap regulation in award of
concession. But these concession agreements are overlooking the financial aspect of
project as the Price Cap regulation is not concerned with viability of project once the
concession is awarded. The Rate of Return type of regulation is rare in road sector but
they impart good lessons for accountability of agreement for viability of commercial
agreements. The lumpy investment in road project can only be made attractive if
periodic re-auctioning is embedded in concession agreement. Of course, it shall
satisfy Demsetz auctioning by exposing to market forces through open competition
and it shall accommodate user’s recourse by securing toll rebates in new agreement.
This will be in line with Alfred Marshall’s suggestion for focusing the bids on prices
or service standards rather than on least investment liability to Government. If the
exercise fails to evoke response then ongoing concessionaire shall continue to operate
for remaining term of agreed concession period. More over, in case of successful
bidding, the ongoing concessionaire shall have preemption right to continue under
now improved agreement as derived from best offer. This type of agreement can be
re-awarded during full economic life of original investment and hence transferring
facility to Government at end of concession is avoided for efficient use of asset. Once
the asset is created, such operations will be beyond traditional engineering practices.
Hence it will require good financial market for such firms to operate and finance the
project. Moreover, a regulatory framework will be needed to see that rebidding
occurs at precise point of time under larger perspective of public interest. This is a
major policy recommendation felt noteworthy in design of concession agreement.
504
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518
APPENDIX -1
Questionnaire for Willingness to Pay Surveys
Car User/Owner’s Interview:-

Road Stretch under Study: Vadodara- Halol toll road Date of Survey:
Traffic Direction : towards Halol/ Vadodara
Vehicle Regi. No.: Age of vehicle:
Vehicle Type: Car/Jeep/SUMO.: (PRIVATE/GOVERNMENT)
Fuel :CNG/PETROL/DIESEL Car Ownership:
1.0 Tolling Concepts Awareness :-
(If in haste, contact number : )
i) Do you know some bridges/ road stretches are under tolling: Yes/No.
ii) Have you ever paid tolls : Yes/No.
iii) Do you think toll projects offer better quality of roads/ bridges : Yes/No.
iv) If no, where did you find toll project not offering proper quality: Project
Name & year of experience & type of problem faced.
v) Do you know Govt, has decided to make transport sector self financing due to shortage of
funds as compared to need ? : Yes/No.
vi) Any comments how otherwise Govt, can finance such projects without tolling (Vague
comments & allegations are not recorded). * Tolling/fuel cess
2.0 Regarding the Current Trip:-
Origin- Travel Purpose Vehicle type Frequency of Family income

Destination time./ (tick) (tick) Traveling and Own
Distance (tick) education
Study/Employmen Hired/ owned Daily, weekly,

t/Health/Business/ Monthly
Social/Shopping/R Sometime
ecreation/Other
Average Average monthly fuel bill Average monthly vehicle Average monthly tolls
monthly km maintenance cost being paid
journey per
car
519
3.0 Presentation of Vadodara-Halol Toll Road project details (Vadodara- Halol Distance =32.0
km) No saving in length but improved traveling conditions & hence saving in cost
Features Earlier condition Service road Toll road Benefits
Width: 7.0 mt two lane 4.0 mt plus 1.5 mt 14.00 mt four lane traffic
shoulder on both segregation and
side extra capacity so
better speed
Riding roughness more than roughness more than roughness around comfortable and
quality & 4500 mm/ km 4500 mm/ km 2500 mm/ km speedy driving
Geometry.
Safety minimum required minimum required Latest guard rails/ better visibility
standards reflecting boards, especially at
road marking, night and no head
central verge on collusion due
to central verge
Road site nil nil road side and comfortable
amenities central verge driving and no
plantation, parking glare at night
lanes and break
down lane
Travel cost Rs.196 (Rs6.11per Rs,206(Rs6.44per Rs.l59(Rs4.96per Rs. 37.0 2L-4L
: VOC fcel km) km) km)
index Rs. 47.0 IL-4L
@280.2
Travel Time 48 minutes 48 minutes 24 minutes saving of 24

Rs. 45 per (40kmph) (40kmph) (80kmph) minutes in both
hour (index cases.
@ 187.3 all valued at Rs. 45
commo.) per hour = Rs.
18.0
A. Service road v/s toll road = Rs.65,00 (uncongested)Earlier two lane v/s toll road =
Rs.55.00 if 20% congestion factor then say Rs.65.00
4.0 Willingness to pay Toll For Vadodara-Halol Toll Road:-

Given idea of saving in physical cost & time cost of Rs. 65/- Toll value acceptable to users is surveyed.
However, if the user has own understanding of VOC & time value
* VOC saving felt by User = Rs. +Rs. Time value of 24 minutes
Total = Rs.
4.1. A
If the toll is paid in cash, given idea of saving in physical cost & time cost
Toll value acceptable to Operator is found out. If passed on to user then also operator shall
express feelings as per market.
520
Proposed Highly Acceptable OK Not acceptable Totally
Toll acceptable unacceptable.
(a) Redaction in ( No trip & total
future trips. (b) diversion)
Change of mode.
Rs. 0.0
Rs.15
Rs.30
Rs.65
(Zero tolling means free roads whatever standards prevail as in ease of state roads.)
4.1B If paid through passes,

Average no. of trips actually enjoyed per pass = i.e. Rs. paid / trip
What should be the toll per trip as per WTP in your case = Rs.
Toll rate acceptable unacceptable.
on passes (a) Reduction in ( No trip & total
Change of mode.
Rs.00
-50%
present \
level
+10%
+20%
+30%
+40%
+50%
+100%
(Zero tolling means free roads whatever standards prevail as in case of state roads.)
4.2 Comments for additional features required to make tolling acceptable e.g. access control
And additional WTP expressed = Rs.
5.0 Halol- Godhra Road Project Details For Willingness to Pay Surveys:
Features Earlier condition Improvement done Benefits
Width: 7.0 mt two lane 10.00 mt two lane traffic segregation by
with shoulders road marking extra
capacity so better speed
Riding quality & roughness more than roughness around comfortable and speedy
Geometry. 4500 mm/ km 2500 mm/ km driving
Safety standards minimum required Latest guard rails/ better visibility
reflecting boards, especially at night
521
road marking
Road site amenities nil road side plantation, comfortable driving
parking lanes
Travel cost : VOC Rs. 196 (Rs 6.11 per Rs. 157(Rs.4.90per Rs. 39.0
Travel Time km) km) Add 20% congestion =
Rs.47.0
48 minutes(50kmph) 48 minutes(50kmph) saving of 24 minutes
valued at Rs. 45 per hour
= Rs. 18.0
So specifically to declare this project envisages :

Reduction in Travel cost due to improved riding surface and almost double speed (Physical cost
saving + time saving valued at Rs, 45 per hour) = Rs.......47.0...................................&
Km.......nil........................... Saved.
5.1. WTP on Halol- Godhra road:
Toll acceptable unacceptable.
(a) Reduction in ( No trip & total
Change of mode.
Rs. 0.0
Rs.15
Rs.30
Rs.60
What is preferred : Separate toll booth for both Sections / individual sectional booth?
6.0 What attribute you feel is guiding toll payment (select from order 1-2-3)
1.0 Km. Saving with fuel-time saving 1-2-3 (not applicable here)
2.0 Time Saving without km saving 1-2-3
3.0 Lower maintenance to vehicle 1-2-3
4.0 Higher speed: 1-2-3
5.0 Access control & Traffic Safety 1-2-3
6.0 Comfortable journey 1-2-3
7.0 Road side amenities 1-2-3
( parking, fuel station, garages, break
down services)
522
APPENDIX-2
Questionnaire for Willingness to Pay Surveys
Truck Operator’s Interview

Bridge/Road Stretch under Study: Vadodara- Halol toll road & Halol- Godhra Rd
Date of Survey:
Name of Firm:
Capacity: LCV / TEMPO / MINITRUCK: NO.
TRUCK/TANKER(2XL): NO.
TRUCK/TANKER(3XL): NO.
TRUCK/TANKER(MULTIXL): NO.
1.0 Tolling Concepts Awareness
i) Do you know some bridges/ road stretches are under tolling: Yes/No.
ii) Have you ever paid tolls: Yes/No.
iii) Do you think toll projects offer better quality of roads/ bridges : Yes/No.
iv) If no, where did you find toll project not offering proper quality ; Project Name & year of
experience & type of problem faced.
v) Do you know Govt, has decided to make transport sector self financing due to shortage of
funds as compared to need ? : Yes/No.
vi) Any comments how otherwise Govt, can finance such projects without tolling (Vague
comments & allegations are not recorded). * Tolling/fuel cess
523
2.0 Regarding the Trip through Vadodara- Halol road:-
1. Vehicle No. Origin- l.Travel time. l.Type of Vehicle Frequency of trip related (short term) costs Long term Costs
2. Type & age Destination 2.Distance material ownership Traveling on 1.Diesel cost per journey (per year)
of vehicle and frequency km 2. approx. MT & Hired/ VHTR (tick) 2.Gil & grease cost 1. Tyres
3. capacity in per month worth of truck owned 3.routine 2.Engine works &
MT load maintenance/servicing other mechanical
4.FueI consignment 4.trip related tolls/taxes work
efficiency S.cost of crew 3.others/taxes
*-*
r-4
Daily, weekly,
Monthly
cn
<*4 rW
^ oi rn
Sometime.
a)In general per KM cost of running above Vehicle = b)per km road tolls paid by this vehiele=
524
3.1 Vadodara- Halol Toll Road Project Details:
Features Earlier Service road Improvement done Benefits

condition
Width: 7.0 mt two lane 4.0 mt plus 1.5 14.00 mt fourlane traffic segregation and
mt shoulder on extra capacity so
both side better speed
Riding roughness more roughness more roughness around 2500 comfortable and
quality & than 4500 mm/ than 4500 mm/ mm/ km speedy driving
Geometry. km km
Safety minimum minimum Latest guard rails/ better visibility
standards required required reflecting boards, road especially at night and
marking, central verge no head on collusion
due to central verge
Road site nil nil road side and central comfortable driving
amenities verge plantation, and no glare at night
parking lanes and
break down lane
Travel cost Rs. 518 Rs.568 Rs. 484 Rs. 34.0 2L-4L add 20
: VOC (Rsl6.19per (Rsl7.74per (Rs. perl5.13 km) congestion%
km) km) = Rs. 41.0 2L-4L
Travel Time Rs. 84.0 IL-4L
64 minutes 64 minutes 39 minutes saving of 25 minutes

(30 kmph) (30kmph) (50kmph) valued at Rs. 160 per
day = Rs.3.0 for both.
So specifically to declare this project envisages:
Reduction in Travel cost due to improved riding surface and better speed results in total saving per one
side trip Rs. 44/- (2L-4L) and Rs. 87/- (IL-4L) . For trucks total saving per one side trip Rs. 44/- (2L-
4L) is more relevant.
3.2 Halol- Godhra road Project Details
Features Earlier condition Improvement done Benefits

Width: 7.0 mt two lane traffic segregation by
10.00 mt two lane
with shoulders road marking extra
capacity so better speed
Riding quality & roughness more than roughness around comfortable and speedy
Geometry. 4500 mm/ km 2500 mm/ km driving
Safety standards minimum required Latest guard rails/ better visibility especially
reflecting boards, at night
road marking
Road site amenities nil road side plantation, comfortable driving
parking lanes
Travel cost : VOC Rs. 640 (Rsl6.85per Rs. 616(Rs.l6.22 per Rs. 24.0 ADD 20% for
Travel Time km) km) congestion =RS.29.0
76 minutes(30 kmph) 51 minutes (45 saving of 25 minutes
kmph) valued at Rs. 160 per day
= Rs.3.0
So specifically to declare this project envisages :
S25
Reduction in Travel cost due to improved riding surface and better speed results in total saving per one
side trip Rs.32
4.1 WTP ON VADODARA-HALOL TOLL ROAD

Actual VOC saving felt by User = Rs. +Rs. Time value of 25 minutes
Total Perceived Saving on This Road =Rs.
If the toll is paid in cash, given idea of saving in physical cost & time cost Toll value acceptable to
User is found out.
Toll level Highly Acceptable OK Not acceptable Totally

acceptable unacceptable.
(a) Reduction in (No trip & total
Change of mode.
Rs. 0.0
Rs.25
Rs.50
Rs.85
Rs.140
If paid through passes, details of type of pass & average cost = Rs. per trip if pass is fully utilized.
Actual no. of trips enjoyed per pass & hence cost pa- trip = Rs.
Expected pass amount per trip =Rs. Highly acceptable
Rs. Acceptable
Rs. O.K.
4.2 WTP ON HALOL -GODHRA ROAD
Actual VOC saving felt by User = Rs. + Rs. Time value of 25 minutes
Total =Rs.
If the toll is paid in cash, given idea of saving in physical cost & time cost Toll value acceptable
to User is found out.
Toll level Highly Acceptable OK Not acceptable Totally
acceptable unacceptable.
(a) Reduction in (No trip & total
future trips. diversion)
(b) Change of
mode.
Rs. 0.0 (exists)
Rs.25
Rs.50
Rs.85
Rs.
526
4.2.1 Comments for additional features required to make tolling acceptable e.g. access
control and additional WTP expressed on VHTR = Rs.
5.1 Percentage of bad road condition km in total length ofjourney:
5.2 WTP for existing total length ofjourney for as it is condition of road:
5.3 WTP for same total journey if it is four lanned point to point:
5.4 Prevailing Fare on discussed journey (both side):
5.5 What attribute you feel is guiding toll payment applicable to any toll project
(select from order 1-2-3)
1.0 Km. Saving with fuel-time saving 1-2-3
2.0 Time Saving without km saving 1-2-3
3.0 Lower maintenance to vehicle 1-2-3
4.0 Higher speed: 1-2-3
5.0 Access control & Traffic Safety 1-2-3
6.0 Comfortable journey 1-2-3
7.0 Road side amenities 1-2-3
(parking, . fuel station, garages, break
down services)
5.6 Other Discussions:
527
APPENDIX-3
Matrix for coefficient of Correlation for WTP survey of car users
Independent Variables for Correlation

XI X2 X3 X4 X5 X6
XI 1 -0.00958 -0.11124 -0.1966 0.300265 0.302282
X2 1 -0.22881 0.006011 0.08146 0.189707
X3 1 0.040323 0.007978 0.180804
X4 1 -0.42253 0.038191
X5 1 0.099676
X6 1
528
APPENDIX - 4
Matrix for coefficient of Correlation for WTP survey of truckers
Independent Variables for Correlation

X1 X2 X3 X4 X5 X6 X7 X8 X9
X1 1 -0.17535 -0.05309 -0.1247 -0.01202 0.027392 0.067221 0.229124 -0.13807
X2 1 0.061733 -0.33476 -0.28601 -0.27705 0.274696 0.006875 0.829999
X3 1 -0.03393 0.006422 0.365675 0.434569 -0.13933 0.19469
X4 1 0.076582 0.437768 -0.15445 -0.03255 -0.33065
X5 1 0.125396 -0.14113 -0.10886 -0.10932
X6 1 0.099771 0.266049 -0.17409
X7 1 -0.20732 0.33495
X8 1 -0.11654
X9 1
529

Thesis - Private Sector Participation in Roads Development Planning and Management Issues

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PRIVATE SECTOR

DR. AMITA S. KANTAWALA

FACULTY OF MANAGEMENT STUDIES

DR. AMITA S. KANTAWALA

PRIVATE SECTOR PARTICIPATION

DR. AMITA S. KANTAWALA

FACULTY OF MANAGEMENT STUDIES

i) INTRODUCTION AND RATIONALE:

As far as Indian scenario is concerned, Government has recognized importance of

ii) OBJECTIVES OF THE STUDY:

Precisely the objectives are:

iii) RESEARCH DESIGN, METHOD OF ANALYSIS AND SOURCES

iii).l Selection of Case Studies:

iii).2 Preliminary Survey for Willingness to Pay:

iv) SCHEME OF CHAPTERS:

Chapter-H is encompassing relevant literature review for exploring the area of

Chapter-HI is basically related to study of spectrum of Private Sector Participation

Chapter-IV presents the development of National Highways in India through

Chapter-VI discusses user’s preference in tolling a highway after developing it for

v) CONCLUSIONS AND SUGGESTIONS

vi) SUGGESTION FOR MORE ACCOUNTABLE AND FLEXIBLE

The Chapterwise conclusions and suggestions could be effectively extracted to

This is to certify that the Thesis entitled PRIVATE SECTOR

PARTICIPATION IN ROADS DEVELOPMENT: PLANNING &

MANAGEMENT ISSUES incorporates the results of independent

investigation carried out by Satish P. Karvekar himself and has at no

KARVEKAR SATISH P. PROF. DR.AMITA S. KANTAWALA.

Candidate Guiding Teacher

Date :\% July 2008.

This study of "Private Sector Participation in Roads Development:

Planning and Management Issues" is basically focused to address the

issues of viability of private investments in building and maintaining roads

in India. The genesis of formulation of this study is inspired from practical

available from World Bank Publications. A humble attempt is made in this

study to inquire and analyze the status of Private Sector Participation in

help of selected case studies and data available on ongoing National

Highway Development Project (NHDP). The researcher has mainly found

that lumpy investment in toll roads is in need of periodic exposure to

up road projects on commercial basis is essential to make the projects

marketable. Of course, user's recourse shall be the guiding principle in

planning and managing these traditionally public assets.

Revering Lord Shree Ganesha, it is wonderful feeling to express gratitude on

It is my great pleasure to express my grateful thanks to Prof.Dr. G.C.

In my office, right from Honourable Secretary, R&B Department Gandhinagar,

1 sincerely thank Alma Mater, School of Planning, CEPT, Ahmedabad for

SATISH PANDURANG KARVEKAR.

CHAPTER-I INTRODUCTION 1-17

CHAPTER-II REVIEW OF LITERATURE 18-69

CHAPTER-III PRIVATE SECTOR PARTICIPATION: DESIGN OF 70-144

Figure: III-2 Traditional Delivery of Road Works 77

Figure: III-3 Changing Delivery of Road Works 81

Figure :III-4 Conceptual Structure of Concession for Roads 90

Figure: III-5 Portugal Case of Selection for Concessionaire 113

Figure: IV-1 NHAI Spending on NHDP 179

Figure:IV-2 Execution of NH Works by NHAI (non PPP) 198

Figure:lV-3 PPP Approval Process for NH 227

Figure-V-l Diagram showing the local alternative of ROB (CHALTHAN) on 267

Figure-V-3 Operational Performance of Delhi NOIDA Toll Bridge 297

Figure:V-6 Cornerstones of NTBCL Concession Agreement 312

Figure: V-8 Traffic Shortfall on Vadodara- Halol Toll Road 342

Figure: V-10 Operational Performance of VHTRL 346

Figure:V-13 Force Majeure Events & Compensation 375

Figure:V-I4 Monthwise Toll Collection for NICE 380

Figure:V-15 Operational Performance ofNICE 382