Description
Decribes the road industry in India, the key problems associated with this industry.
GROUP 1
?
Extensive road network of --3.3 million kilometers (km), --2nd largest in the world, --carrying 61% of the country‘s total freight and --85% of total passenger traffic. Projected annual growth over the 11th FYP is 12–15% for passenger and 15–18% for cargo traffic. World Bank estimates over the next 10 years - need to widen 15,000 km of national highways from two to four lanes, and a further 16,500 km requires upgrading from intermediate to two lanes.
?
?
?
An estimated $50 billion–$60 billion investment is required over the next 5 years to improve road infrastructure But Maintenance spending on roads in India is estimated to be very less
?
•The share of road traffic in total traffic has increased steadily in India over the past few decades.
• While roads accounted for merely 15% of goods and passenger traffic in 1950, its market share has expanded of late to over 60% of goods traffic and as much as 87% of passenger traffic •Going forward, the increase in road traffic is expected to continue. Up to 2015 the volume of passenger and goods traffic is likely to rise by roughly 15% per year on average • Some of the main reasons for the increase in road traffic are the country’s ongoing economic expansion and the rising level of motor vehicle usage, from a low basis.
?
Over the past decade several major projects for development of highways linking the major cities have been planned – and work started on most of them. What is of significance is that private sector involvement (BOT projects) has finally been found to be feasible in the Indian context. This has led to an accelerated growth in this sector – which had long been faced with financial constraints. This has also facilitated improvement in the quality of the new highways and introduction of the latest concepts for toll collection, signage's etc. The process of development of the new highways is expected to continue for many years to come.
?
?
?
?
India’s economic structure reflects its infrastructure gap ? It is widely known that India‘s current infrastructure is fraught with many weaknesses and that it is below international standards even when compared with other emerging markets.
?
With higher growth targets and a rising population, maintaining current levels of infrastructure will require a staggering increase in investment.
Indian private companies active in the sector: ? GMR Group ? Larsen & Toubro ? Hindustan Construction Co. ? IVRCL Infrastructure ? Afcons Infrastructure ? Nagarjuna Construction Co. ? Maytas Infra Pvt Ltd.
•Infrastructure is an integral part of economic development and the availability of quality infrastructure services is the key to sustained growth of any economy. •High quality infrastructure is essential to harness the growth impulses in the economy. •The extent and the quality of road network is an important index of infrastructure development in a country •The Planning Commission has observed that poor infrastructure is India’s “Achilles’ heel” which is estimated to cost India 3?4% of lost GDP a year.
•The Planning Commission has estimated that India needs to increase its spending on infrastructure from 4–5% to 9% of GDP if it is to achieve its growth targets.
•Infrastructure and related services have significant implications for achieving sustainable development objectives, as infrastructure services underpin many aspects of economic and social activity. •As a consequence, infrastructure failure can have a widespread impact across the community. •Without reliable power, well-connected utilities and a modern transport network a country’s economy is not able to develop successfully in the long term.
Public sector ----> main provider of basic infrastructure in India. However, public financing—already limited by the deficit reduction provisions of the FRBM Act—will not alone be able to generate the needed levels of investments ($475 billion) to improve infrastructure facilities.
?
OTHER INFRASTRUCTURE PROJECT PROBLEMS: ? Lawsuits from farmers unwilling to give up their land and ? General lack of readiness of construction sites, ? Inefficient contract management and procurement processes, ? A lack of institutional capacity in government agencies, ? Law and order problems ? Poor performance of some contractors ? Given the diverse geographic zones, cost of construction varies significantly across the country financing is a major issue given the long payback periods
?
Only 4,000 km of highways have tolling at the moment.
?
Encouraging annuity-based tolling instead of direct tolling to build confidence of private entrance with emphasis on a shift to automated tolling.
The NHAI anticipates 100 toll plazas being commissioned over next three years In addition to the national highways, a number of states are undertaking major road projects, including Rajasthan, Maharashtra, Karnataka, Andhra Pradesh, Gujarat, and Tamil Nadu, with public participation.
?
?
?
The NHDP, covering around 50,000 km of highways, is being funded by multilateral agencies, including the WB, the ADB, and the Japan Bank for Int. Cooperation. Opportunities are emerging for investors, contractors, consultants, operations and maintenance operators, equipment suppliers, toll operators, and intelligent transportation system companies . Tolling potential for the NHDP is high.
?
?
?
Accordingly, the strategy of infrastructure deficit includes :
the
Government
for
bridging
the
(i) Revising policies and regulations across sectors for enhancing private sector participation (PSP) in infrastructure development including through public-private partnerships (PPPs) (ii) Enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds through all possible sources
?
?
The Government expects the shares of public and private investment through PSP including PPP in total infrastructure investment during the 11th FYP to be 70% and 30% respectively, compared to 83% and 17% respectively during the 10th FYP. The major infrastructure sector reforms in road sector
• Model concession agreement for toll highways has been published. MCA for PPPs in national highways has been approved by the Planning Commission. • The National Highways Act, 1956, has been amended to attract private investment in road development, maintenance, and operation. Amendments include:
? ? ?
?
?
Allowing private investment in national highways projects. Allowing private investor to levy, collect, and retain user fees. Regulate traffic on NH acc. to the Motor Vehicle Act, 1988. NHAI has also formed an SPV for funding road projects involving minimal support from National Highway Authority of India for equity or debt. Industry status has been accorded to the road sector as infrastructure as defined in Section 18 (1) (12) of the Infrastructure Act includes roads.
FORWARD REFORM AGENDA ? Reducing resource constraints in terms of finances, technical manpower, project management, and institutional strength in sector institutions. ? Establishing a policy framework in states as most roads are in the state sector. ? Process to reduce risk perception among project developers and investors. ? Improving land acquisition. ? Increasing availability of traffic data to facilitate financial viability projections.
?
The dedicated Central Road Fund created from cess on diesel and petrol, NHAI is expected to get Rs. 2000 crore annually, which should reduce the fund crunch for construction of roads.
?
Among the policy incentives for promoting investments in the road sector1. 2. 3.
4.
5.
? ? ?
100 per cent Foreign Direct Investment is permitted, five year tax holiday and 30 per cent deduction on profits for the purpose of tax during the next five years for the private players Viability Gap Funding (a one-time or deferred grant for infrastructure projects that may have long gestation periods and limited financial returns) available up to 40% of project cost based on competitive bidding for each project Easier external commercial borrowing norms
Pradhan Mantri Gram Sadak Yojana has been launched on December 25, 2000. Duty-free import of modern high capacity equipment for highway construction. Highway Authority takes the responsibility of providing land, utility shifting and environmental clearances
?
The infrastructure finance market in India is largely characterized with inadequate flow of long-term funds despite a large and diversified financial sector The tenor of available funds from the domestic market is typically 10 years or less with a 2–3 year re-set clause, effectively making such funding short-term. This typically leads to front-loading of tariffs during the initial years of the project cycle which adversely affects affordability of the services for the low income end-users In the absence of long-term fixed rate financing, stability of cash flows are difficult to achieve. Table summarizes the available financing sources in infrastructure.
?
?
?
?
?
Infrastructure finance market is further characterized by the absence of an active long term corporate debt market, asymmetric information on infrastructure projects, and inherent risks in financing infrastructure projects Adding to the problem of inadequate long-term funds is the conversion of development finance institutions (DFIs), which had been the major source of long-term finance, into commercial banks. Further, the commercial banks in general have limited experience in infrastructure financing
?
?
? ? ?
Through budgetary allocations from the Government of India. Cess - The Government of India introduced a Cess on both Petrol and Diesel. Parliament decreed that the fund so collected were to be put aside in a Central Road Fund (CRF) for exclusive utilization for the development of a modern road network. Today, The Cess contributes between Rs 5 to 6 Thousands crores per annum towards NHDP. Loan assistance from international funding agencies. Loan assistance is available from multilateral development agencies like Asian Development Bank and World Bank or Other overseas lending agencies like Japanese Bank of International Co - Operation
?
?
?
Market borrowing. ? NHAI proposes to tap the market by securities receipts Private sector participation. ? Major policy initiatives have been taken by the Government to attract foreign as well as domestic private investments. ? To promote involvement of the private sector in construction and maintenance of National Highways, Some Projects are offered on Build Operate and Transfer (BOT) basis to private agencies. ? After the concession period ,which can range up to 30 years, this road is to be transferred back to NHAI by the Concessionaries.
? ? ? ? ?
Common form of ppp in the road sector Build-Operate-Transfer (Toll) Design-Build-Finance-Operate (DBFO) Build-Operate-Transfer (Annuity) Public Private Partnership is proving to be a successful mechanism for developing and maintaining the National Highways. Chart shows PPP Infra project status in India
?
There is the envisaged demand for investments in infrastructure projects by private sector players, particularly in the energy and road sectors This investments transactions comes through adequately structured project finance
?
?
Project financing usually involves setting up of a special purpose vehicle (SPV)— bound by a contractual matrix to various project participants—which raises debt and services it from its own cash flows, without recourse to its sponsors.
The considerable investments proposed by the private sector over the next few years, would to a considerable extent be funded by debt- raised either as term loans or from the capital market. Going forward, it is expected that private sector participation in the financing, operations and maintenance of road sector projects to increase significantly
?
?
?
National Highways Authority of India (NHAI) was constituted by an Act of Parliament, the National Highways Authority of India Act, 1988 and became operational in 1995. The Authority is an autonomous body with executive responsibility for development, maintenance and operation of National Highways and associated facilities vested in it, by the Government of India. The NHAI has presently been mandated to implement the National Highways Development Project (NHDP).
?
?
?
The Authority has adapted a business model that out-sources through a transparent International competitive bidding process, a number of activities (such as design, construction, supervision, etc.) rather than undertaking them internally or through the Government public works organisation. The resultant lean structure of the organization, flexibility in decision making and ability to adapt in terms of structure, business processes and systems is a critical element for implementing an ambitious project of this magnitude. Besides the very best of Indian private sector companies, a total of 86 contracting and consulting firms from 27 countries including the US, UK, Australia, France, Germany, Italy, Japan, Malaysia, South Korea and China are already participating in various projects of NHDP.
?
?
?
As can be seen from the figure given above, the concession agreement between the project owner (either NHAI or some of the state road development corporations) and the concessionaire defines the framework within which such projects operate. The concession period for such projects usually ranges between 10 and 30 years, and is usually a function of the expected toll collections along the stretch The contractual structure broadly defines the allocation of risks- thus while construction, operation and market risks are absorbed by the concessionaire, the political and permitting risks are generally assumed by the project owner.
?
?
?
The CA entitles the concessionaire to design, engineer, finance, construct, operate and maintain the project facility during the concession period as well as to levy and collect toll fees from vehicles for using the project highway or any part thereof The CA usually stipulates that the tolls would be levied at rates notified by a government agency and also defines the rates for annual escalation in toll rates.
Some of the concession agreements also have provisions whereby the project owner undertakes to indemnify the project company from a shortfall in toll collections due to a political force majeure, through an advance/ revenue shortfall loans.
?
?
?
Most concession agreements provide for an independent consultant or supervisor to monitor the progress and the quality of construction during the project period.
Provides for the appointment of an O&M contractor to operate & maintain the highway during the concession period with ?events of default‘ being clearly specified Force majeure clauses are an integral part of any concession agreement with the types of such force majeure and the consequent sharing of such risks among the government, sponsors and the lenders being clearly defined
?
?
“The limited growth of this form of financing so far, in ICRA’s opinion, is attributable mainly to the high-risk perception of project financiers and the inability of project entities to offer suitable structures that mitigate these risks”
From a credit perspective, assessing a project can be challenging, given that the debt investor has access to just a single source of cash flow, much unlike in a corporate or structured finance transaction, where multiple and diversified sources of cash flow may be available.
?
Completion risk refers to the inability of a project to commence commercial operations on time and within the stated cost. This risk perception is significantly influenced by the credit worthiness and track record of the sponsors and their ability and willingness to support the project via contingent equity/subordinated debt for funding cost and time over-runs, if any The risks are also dependent on the complexity of construction, as greater the complexity (for instance, in the case of a petrochemical facility), higher the risks arising on this count.
?
?
?
In certain types of projects, such as ports and roads, project completion is also a function of the permitting risks associated with obtaining the necessary Rights of Way (ROW), environmental clearances and Government approvals
?
Completion risks are usually mitigated through strong fixed price, date certain, turnkey contracts with credit-worthy contractors, along with the provision of adequate liquidated damages for delays in construction
While assessing completion risk, adequate attention is also paid to the experience of the engineering, procurement & construction (EPC) contractor and its track record in constructing similar projects, on time and within the cost budgets.
?
THE FINANCING STRUCTURE IS USUALLY REVIEWED FOR:
?
The capital structure of a project, which is evaluated to assess whether the debt-equity ratio is in. line with the underlying business risks and that of other projects of similar size and complexity. The availability of substantial debt reserves to meet unforeseen circumstances.
?
?
?
The matching of project cash flows (under various sensitivity scenarios) with the debt service payouts and the potential for cash flow mismatches.
?
The pricing structure adopted for debt and the exposure of the debt to interest rate and currency risks. Such risks are particularly significant where the project raises variable rate debt or liabilities in a currency other than the one in which its revenues would be denominated. Limitations on the ability of the project company to take on new debt. Usually, most projects have a high leverage, and while equity is arranged privately from sponsors, the project would be dependent on financial institutions and banks for arranging the debt component.
?
? ?
?
Usually, most projects have a high leverage, and while equity is arranged privately from sponsors, the project would be dependent on financial institutions and banks for arranging the debt component. Such risks usually arise in projects using complex technology (power plants or refinery projects, for instance); for projects in the roads, ports, and airport sectors, such risks are usually of a lower order. Where technology is well established, the focus of analysis is usually on determining its reliability and the sustainability of the technology platform over the tenure of debt.
?
?
?
Technology risks, where imminent, are usually mitigated through performance guarantees/warranties from the manufacturer, contractor or operator, and the availability of adequate debt reserves to allow for operating disruptions.
The risks associated with disruptions in operations due to mechanical failure of equipment are usually mitigated through Operations and Maintenance (O&M) contracts
?
? ?
? ? ?
As discussed earlier, a project involves a number of counter-parties who are bound to it by the contractual structure. Therefore, an evaluation of the strength and reliability of such participants assumes considerable importance in ascertaining the credit strength of the project. Counter-parties to projects usually include feedstock/raw material suppliers, principal off-takers, and EPC contractors. Even a sponsor could become a source of counter-party risk, as it needs to provide equity during the construction stage The counter-party risks are usually addressed through performance guarantees, letters of credit and payment security mechanisms (such as escrows), most commonly seen in the case of power projects.
However, it has been observed that such contractual risk mitigants, however strong, may not be effective in insulating a project from this risk, unless the project is fundamentally cost competitive and makes commercial sense for all the project participants.
?
Market risks usually arise because of insufficient demand for products/services, changing industry structures, or pricing volatility Given the long-term nature of project financing, a considerable source of market risk is the possibility of dramatic changes in demand patterns for the product, either because of product obsolescence or sudden and large capacity creations, which could severely affect the economics of the project under consideration the primary focus is on evaluating the adequacy of existing demand, the potential for growth in demand and the possibility of alternative assets (e.g. an alternative route to a toll road) being created, which could undermine demand for the project being financed. Assessing demand patterns for such projects, particularly road projects, is often a daunting task since in most cases, the demand is highly price elastic and a function of the pattern of socioeconomic development in the service area of the road.
?
?
?
? ?
Political and regulatory risks continue to play an important role in the development of the project finance business in India. Political and regulatory risks could manifest themselves in various forms, and significantly impact the economics of the project under evaluation. For instance, such risks may take the form of: Lack of transparency and predictability in the functioning of the regulatory commissions Resistance to increases in user charges for common utilities such as water charges, toll tax rates, and energy charges Problems in acquisition of land, which are typical in the case of road projects regulatory and political risks are often difficult to quantify and also mitigate
?
1.
2. 3.
THANK YOU ….For the ?road? ahead…..
doc_156742552.pptx
Decribes the road industry in India, the key problems associated with this industry.
GROUP 1
?
Extensive road network of --3.3 million kilometers (km), --2nd largest in the world, --carrying 61% of the country‘s total freight and --85% of total passenger traffic. Projected annual growth over the 11th FYP is 12–15% for passenger and 15–18% for cargo traffic. World Bank estimates over the next 10 years - need to widen 15,000 km of national highways from two to four lanes, and a further 16,500 km requires upgrading from intermediate to two lanes.
?
?
?
An estimated $50 billion–$60 billion investment is required over the next 5 years to improve road infrastructure But Maintenance spending on roads in India is estimated to be very less
?
•The share of road traffic in total traffic has increased steadily in India over the past few decades.
• While roads accounted for merely 15% of goods and passenger traffic in 1950, its market share has expanded of late to over 60% of goods traffic and as much as 87% of passenger traffic •Going forward, the increase in road traffic is expected to continue. Up to 2015 the volume of passenger and goods traffic is likely to rise by roughly 15% per year on average • Some of the main reasons for the increase in road traffic are the country’s ongoing economic expansion and the rising level of motor vehicle usage, from a low basis.
?
Over the past decade several major projects for development of highways linking the major cities have been planned – and work started on most of them. What is of significance is that private sector involvement (BOT projects) has finally been found to be feasible in the Indian context. This has led to an accelerated growth in this sector – which had long been faced with financial constraints. This has also facilitated improvement in the quality of the new highways and introduction of the latest concepts for toll collection, signage's etc. The process of development of the new highways is expected to continue for many years to come.
?
?
?
?
India’s economic structure reflects its infrastructure gap ? It is widely known that India‘s current infrastructure is fraught with many weaknesses and that it is below international standards even when compared with other emerging markets.
?
With higher growth targets and a rising population, maintaining current levels of infrastructure will require a staggering increase in investment.
Indian private companies active in the sector: ? GMR Group ? Larsen & Toubro ? Hindustan Construction Co. ? IVRCL Infrastructure ? Afcons Infrastructure ? Nagarjuna Construction Co. ? Maytas Infra Pvt Ltd.
•Infrastructure is an integral part of economic development and the availability of quality infrastructure services is the key to sustained growth of any economy. •High quality infrastructure is essential to harness the growth impulses in the economy. •The extent and the quality of road network is an important index of infrastructure development in a country •The Planning Commission has observed that poor infrastructure is India’s “Achilles’ heel” which is estimated to cost India 3?4% of lost GDP a year.
•The Planning Commission has estimated that India needs to increase its spending on infrastructure from 4–5% to 9% of GDP if it is to achieve its growth targets.
•Infrastructure and related services have significant implications for achieving sustainable development objectives, as infrastructure services underpin many aspects of economic and social activity. •As a consequence, infrastructure failure can have a widespread impact across the community. •Without reliable power, well-connected utilities and a modern transport network a country’s economy is not able to develop successfully in the long term.
Public sector ----> main provider of basic infrastructure in India. However, public financing—already limited by the deficit reduction provisions of the FRBM Act—will not alone be able to generate the needed levels of investments ($475 billion) to improve infrastructure facilities.
?
OTHER INFRASTRUCTURE PROJECT PROBLEMS: ? Lawsuits from farmers unwilling to give up their land and ? General lack of readiness of construction sites, ? Inefficient contract management and procurement processes, ? A lack of institutional capacity in government agencies, ? Law and order problems ? Poor performance of some contractors ? Given the diverse geographic zones, cost of construction varies significantly across the country financing is a major issue given the long payback periods
?
Only 4,000 km of highways have tolling at the moment.
?
Encouraging annuity-based tolling instead of direct tolling to build confidence of private entrance with emphasis on a shift to automated tolling.
The NHAI anticipates 100 toll plazas being commissioned over next three years In addition to the national highways, a number of states are undertaking major road projects, including Rajasthan, Maharashtra, Karnataka, Andhra Pradesh, Gujarat, and Tamil Nadu, with public participation.
?
?
?
The NHDP, covering around 50,000 km of highways, is being funded by multilateral agencies, including the WB, the ADB, and the Japan Bank for Int. Cooperation. Opportunities are emerging for investors, contractors, consultants, operations and maintenance operators, equipment suppliers, toll operators, and intelligent transportation system companies . Tolling potential for the NHDP is high.
?
?
?
Accordingly, the strategy of infrastructure deficit includes :
the
Government
for
bridging
the
(i) Revising policies and regulations across sectors for enhancing private sector participation (PSP) in infrastructure development including through public-private partnerships (PPPs) (ii) Enabling arrangements for bridging the enormous deficit in infrastructure financing especially for long-term funds through all possible sources
?
?
The Government expects the shares of public and private investment through PSP including PPP in total infrastructure investment during the 11th FYP to be 70% and 30% respectively, compared to 83% and 17% respectively during the 10th FYP. The major infrastructure sector reforms in road sector
• Model concession agreement for toll highways has been published. MCA for PPPs in national highways has been approved by the Planning Commission. • The National Highways Act, 1956, has been amended to attract private investment in road development, maintenance, and operation. Amendments include:
? ? ?
?
?
Allowing private investment in national highways projects. Allowing private investor to levy, collect, and retain user fees. Regulate traffic on NH acc. to the Motor Vehicle Act, 1988. NHAI has also formed an SPV for funding road projects involving minimal support from National Highway Authority of India for equity or debt. Industry status has been accorded to the road sector as infrastructure as defined in Section 18 (1) (12) of the Infrastructure Act includes roads.
FORWARD REFORM AGENDA ? Reducing resource constraints in terms of finances, technical manpower, project management, and institutional strength in sector institutions. ? Establishing a policy framework in states as most roads are in the state sector. ? Process to reduce risk perception among project developers and investors. ? Improving land acquisition. ? Increasing availability of traffic data to facilitate financial viability projections.
?
The dedicated Central Road Fund created from cess on diesel and petrol, NHAI is expected to get Rs. 2000 crore annually, which should reduce the fund crunch for construction of roads.
?
Among the policy incentives for promoting investments in the road sector1. 2. 3.
4.
5.
? ? ?
100 per cent Foreign Direct Investment is permitted, five year tax holiday and 30 per cent deduction on profits for the purpose of tax during the next five years for the private players Viability Gap Funding (a one-time or deferred grant for infrastructure projects that may have long gestation periods and limited financial returns) available up to 40% of project cost based on competitive bidding for each project Easier external commercial borrowing norms
Pradhan Mantri Gram Sadak Yojana has been launched on December 25, 2000. Duty-free import of modern high capacity equipment for highway construction. Highway Authority takes the responsibility of providing land, utility shifting and environmental clearances
?
The infrastructure finance market in India is largely characterized with inadequate flow of long-term funds despite a large and diversified financial sector The tenor of available funds from the domestic market is typically 10 years or less with a 2–3 year re-set clause, effectively making such funding short-term. This typically leads to front-loading of tariffs during the initial years of the project cycle which adversely affects affordability of the services for the low income end-users In the absence of long-term fixed rate financing, stability of cash flows are difficult to achieve. Table summarizes the available financing sources in infrastructure.
?
?
?
?
?
Infrastructure finance market is further characterized by the absence of an active long term corporate debt market, asymmetric information on infrastructure projects, and inherent risks in financing infrastructure projects Adding to the problem of inadequate long-term funds is the conversion of development finance institutions (DFIs), which had been the major source of long-term finance, into commercial banks. Further, the commercial banks in general have limited experience in infrastructure financing
?
?
? ? ?
Through budgetary allocations from the Government of India. Cess - The Government of India introduced a Cess on both Petrol and Diesel. Parliament decreed that the fund so collected were to be put aside in a Central Road Fund (CRF) for exclusive utilization for the development of a modern road network. Today, The Cess contributes between Rs 5 to 6 Thousands crores per annum towards NHDP. Loan assistance from international funding agencies. Loan assistance is available from multilateral development agencies like Asian Development Bank and World Bank or Other overseas lending agencies like Japanese Bank of International Co - Operation
?
?
?
Market borrowing. ? NHAI proposes to tap the market by securities receipts Private sector participation. ? Major policy initiatives have been taken by the Government to attract foreign as well as domestic private investments. ? To promote involvement of the private sector in construction and maintenance of National Highways, Some Projects are offered on Build Operate and Transfer (BOT) basis to private agencies. ? After the concession period ,which can range up to 30 years, this road is to be transferred back to NHAI by the Concessionaries.
? ? ? ? ?
Common form of ppp in the road sector Build-Operate-Transfer (Toll) Design-Build-Finance-Operate (DBFO) Build-Operate-Transfer (Annuity) Public Private Partnership is proving to be a successful mechanism for developing and maintaining the National Highways. Chart shows PPP Infra project status in India
?
There is the envisaged demand for investments in infrastructure projects by private sector players, particularly in the energy and road sectors This investments transactions comes through adequately structured project finance
?
?
Project financing usually involves setting up of a special purpose vehicle (SPV)— bound by a contractual matrix to various project participants—which raises debt and services it from its own cash flows, without recourse to its sponsors.
The considerable investments proposed by the private sector over the next few years, would to a considerable extent be funded by debt- raised either as term loans or from the capital market. Going forward, it is expected that private sector participation in the financing, operations and maintenance of road sector projects to increase significantly
?
?
?
National Highways Authority of India (NHAI) was constituted by an Act of Parliament, the National Highways Authority of India Act, 1988 and became operational in 1995. The Authority is an autonomous body with executive responsibility for development, maintenance and operation of National Highways and associated facilities vested in it, by the Government of India. The NHAI has presently been mandated to implement the National Highways Development Project (NHDP).
?
?
?
The Authority has adapted a business model that out-sources through a transparent International competitive bidding process, a number of activities (such as design, construction, supervision, etc.) rather than undertaking them internally or through the Government public works organisation. The resultant lean structure of the organization, flexibility in decision making and ability to adapt in terms of structure, business processes and systems is a critical element for implementing an ambitious project of this magnitude. Besides the very best of Indian private sector companies, a total of 86 contracting and consulting firms from 27 countries including the US, UK, Australia, France, Germany, Italy, Japan, Malaysia, South Korea and China are already participating in various projects of NHDP.
?
?
?
As can be seen from the figure given above, the concession agreement between the project owner (either NHAI or some of the state road development corporations) and the concessionaire defines the framework within which such projects operate. The concession period for such projects usually ranges between 10 and 30 years, and is usually a function of the expected toll collections along the stretch The contractual structure broadly defines the allocation of risks- thus while construction, operation and market risks are absorbed by the concessionaire, the political and permitting risks are generally assumed by the project owner.
?
?
?
The CA entitles the concessionaire to design, engineer, finance, construct, operate and maintain the project facility during the concession period as well as to levy and collect toll fees from vehicles for using the project highway or any part thereof The CA usually stipulates that the tolls would be levied at rates notified by a government agency and also defines the rates for annual escalation in toll rates.
Some of the concession agreements also have provisions whereby the project owner undertakes to indemnify the project company from a shortfall in toll collections due to a political force majeure, through an advance/ revenue shortfall loans.
?
?
?
Most concession agreements provide for an independent consultant or supervisor to monitor the progress and the quality of construction during the project period.
Provides for the appointment of an O&M contractor to operate & maintain the highway during the concession period with ?events of default‘ being clearly specified Force majeure clauses are an integral part of any concession agreement with the types of such force majeure and the consequent sharing of such risks among the government, sponsors and the lenders being clearly defined
?
?
“The limited growth of this form of financing so far, in ICRA’s opinion, is attributable mainly to the high-risk perception of project financiers and the inability of project entities to offer suitable structures that mitigate these risks”
From a credit perspective, assessing a project can be challenging, given that the debt investor has access to just a single source of cash flow, much unlike in a corporate or structured finance transaction, where multiple and diversified sources of cash flow may be available.
?
Completion risk refers to the inability of a project to commence commercial operations on time and within the stated cost. This risk perception is significantly influenced by the credit worthiness and track record of the sponsors and their ability and willingness to support the project via contingent equity/subordinated debt for funding cost and time over-runs, if any The risks are also dependent on the complexity of construction, as greater the complexity (for instance, in the case of a petrochemical facility), higher the risks arising on this count.
?
?
?
In certain types of projects, such as ports and roads, project completion is also a function of the permitting risks associated with obtaining the necessary Rights of Way (ROW), environmental clearances and Government approvals
?
Completion risks are usually mitigated through strong fixed price, date certain, turnkey contracts with credit-worthy contractors, along with the provision of adequate liquidated damages for delays in construction
While assessing completion risk, adequate attention is also paid to the experience of the engineering, procurement & construction (EPC) contractor and its track record in constructing similar projects, on time and within the cost budgets.
?
THE FINANCING STRUCTURE IS USUALLY REVIEWED FOR:
?
The capital structure of a project, which is evaluated to assess whether the debt-equity ratio is in. line with the underlying business risks and that of other projects of similar size and complexity. The availability of substantial debt reserves to meet unforeseen circumstances.
?
?
?
The matching of project cash flows (under various sensitivity scenarios) with the debt service payouts and the potential for cash flow mismatches.
?
The pricing structure adopted for debt and the exposure of the debt to interest rate and currency risks. Such risks are particularly significant where the project raises variable rate debt or liabilities in a currency other than the one in which its revenues would be denominated. Limitations on the ability of the project company to take on new debt. Usually, most projects have a high leverage, and while equity is arranged privately from sponsors, the project would be dependent on financial institutions and banks for arranging the debt component.
?
? ?
?
Usually, most projects have a high leverage, and while equity is arranged privately from sponsors, the project would be dependent on financial institutions and banks for arranging the debt component. Such risks usually arise in projects using complex technology (power plants or refinery projects, for instance); for projects in the roads, ports, and airport sectors, such risks are usually of a lower order. Where technology is well established, the focus of analysis is usually on determining its reliability and the sustainability of the technology platform over the tenure of debt.
?
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Technology risks, where imminent, are usually mitigated through performance guarantees/warranties from the manufacturer, contractor or operator, and the availability of adequate debt reserves to allow for operating disruptions.
The risks associated with disruptions in operations due to mechanical failure of equipment are usually mitigated through Operations and Maintenance (O&M) contracts
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As discussed earlier, a project involves a number of counter-parties who are bound to it by the contractual structure. Therefore, an evaluation of the strength and reliability of such participants assumes considerable importance in ascertaining the credit strength of the project. Counter-parties to projects usually include feedstock/raw material suppliers, principal off-takers, and EPC contractors. Even a sponsor could become a source of counter-party risk, as it needs to provide equity during the construction stage The counter-party risks are usually addressed through performance guarantees, letters of credit and payment security mechanisms (such as escrows), most commonly seen in the case of power projects.
However, it has been observed that such contractual risk mitigants, however strong, may not be effective in insulating a project from this risk, unless the project is fundamentally cost competitive and makes commercial sense for all the project participants.
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Market risks usually arise because of insufficient demand for products/services, changing industry structures, or pricing volatility Given the long-term nature of project financing, a considerable source of market risk is the possibility of dramatic changes in demand patterns for the product, either because of product obsolescence or sudden and large capacity creations, which could severely affect the economics of the project under consideration the primary focus is on evaluating the adequacy of existing demand, the potential for growth in demand and the possibility of alternative assets (e.g. an alternative route to a toll road) being created, which could undermine demand for the project being financed. Assessing demand patterns for such projects, particularly road projects, is often a daunting task since in most cases, the demand is highly price elastic and a function of the pattern of socioeconomic development in the service area of the road.
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Political and regulatory risks continue to play an important role in the development of the project finance business in India. Political and regulatory risks could manifest themselves in various forms, and significantly impact the economics of the project under evaluation. For instance, such risks may take the form of: Lack of transparency and predictability in the functioning of the regulatory commissions Resistance to increases in user charges for common utilities such as water charges, toll tax rates, and energy charges Problems in acquisition of land, which are typical in the case of road projects regulatory and political risks are often difficult to quantify and also mitigate
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THANK YOU ….For the ?road? ahead…..
doc_156742552.pptx