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Road infrastructure is of prime importance for the growth of the economy, since around
60% of freight and 85% of passenger traffic moves by road in India. The National Highways
only constitute around 1.7% of the road network, but carry 40% of the total road traffic. Yet only
24% of the countrys national highways are four-lane and meet the required standards. The
National Highway Development Programme (NHDP) is the largest and foremost infrastructure
program being undertaken in the country. The program envisages upgrading or strengthening of
around 54,000 km of the highways in several phases with an investment of around INR 3,000
Economic liberalization in 1990s necessitated development of a world-class road network
to trigger the economic growth trajectory for India. The concept of involving private sector was
mooted as the investment required for this task was well beyond the budgetary support. Thus
private sector participation in the form of Public Private Partnership emerged in mid nineties and
entrenched itself in 200010 as the most preferred mode of delivery in the construction of
National Highways in India.

Typical Project description and need:

Name of the National Length in Project Stretch Indicative Project Assignment period
Highway Km Cost (months)
(In Rs. cr.)

Four Laning of MH- 145.00 km 348.800 to km 1520.00 36 months

KNT 493.000
Border - Sangareddy
(km 348 to km 493) of

Scope of work
The scope of work will broadly include rehabilitation, up gradation and widening of the existing
carriageway to four lane standards with construction of new pavement, rehabilitation of existing
pavement, construction and/or rehabilitation of major and minor bridges, culverts, road
intersections, interchanges, drains, etc. and the operation and maintenance thereof.
Project objectives:
The proposed project focuses on contribution in the development of economic relations, trade
and transport communications in southern part of India through improving regional road
This highway project mainly focuses on the following:

Enhanced safety of the traffic, the road users and the people living close to the highway.

Enhanced operational efficiency of the highway.

Fulfillment of the access needs of the local population.

Minimal adverse impact on the road users and the local population due to construction

Planned outputs:
At the pre execution phase, the project has to go through the following stages
Pre-Feasibility study with various alternatives
Feasibility study for bankable project
Detailed design
Tender documents for construction
Specific studies (hydrology, structures, environmental impact, social
impact, toll/transit fees, financial management)
Training of local staff

Project Feasibility study

The feasibility of the project is evaluated in two basic phases, viz
Pre-feasibility Study (Concept and Initiation Phase)
This step implies the discussion of the investment idea. It may include a representation of
the investment idea with a simple legal, marketing, technical and engineering, financial
and economical, or social criterion that lead to a primary approval or refusal of the idea.
Detailed Feasibility Study (Design and Development Phase)
The detailed feasibility study includes more detailed studies of the investment idea with
a detailed legal, marketing, technical and engineering, financial and economical, or social
criterion that lead to project appraisal. Generally, the tasks associated with such studies
include the following

Legal study, that includes the legal aspects of the project, any legal issues forbidding the
project and any legal modifications required to proceed in this project.
Technical and engineering studies, which define the expected capacity of the NH after
upgradation, determination of no. of lanes, complete design, construction process and method,
site location, and planning schedules. A detail study regarding feasibility of the proposed
upgradation of the HIGHWAY is done considering Visibility and Road Safety Black Spot
inventory , description of Road Cross-Sections ,Geotechnical analysis. Hydrology study is
important due to the severe problems of erosion, which encountered on the road banks. Slope
stability problems at different sections should be exhaustively surveyed. All existing bridges and
site proposed bridges on the present road have to be thoroughly inspected before proceeding
further. For each existing bridge decision should made for repair or complete reconstruction. A
complete study of road geometry conditions is also very important; for that data have to be
collected about existing geometry, roadside facilities, visibility conditions and risk zones during
different seasons of the year.
Financial and economical studies, that define the investment costs of construction, cost of
material, labour, machines etc, financial schedule, resources and budgets, and revenues or
benefits inform of toll tax. The Economic Feasibility of the Project is to be confirmed in
consistence with the Pre-Feasibility Report issued for the needs of the banks Appraisal for loan.
Alternate pavement design options for the Project Road meeting the economic feasibility has to
be proposed. Financial analysis is carried out to assess sustainability for Governments budget.
Proposed tolls are eventually taken into account.

Social study, In addition to pure technical engineering surveys, social impact studies is equally
important and to be also undertaken during the inspection period with relevant site surveys.
This study incorporates Social Impact Assessment on the neighboring area of the proposed
stretch of the road. Social feasibility study measures the social profitability of the project. It is
necessary to carry out to review the feasibility of investment from the social point of view. It
measures the social profitability of the investment project.

Other environmental issues also considered such as River Erosion Protection, Slope Stability
Assessment, and Environmental Impact Assess. Specific technical studies have to be carried out
with relevant site visits to incorporate concern hydrology of the area, slope stability and
structures in addition to existing road geometry.
Feasibility Study According to the World Bank Procedure
The World Bank (WB) provides funds to governments and public organizations guaranteed by
their governments to execute public projects. Each year the World Bank lends between US$15-
$20 billion for projects in more than 100 countries. The feasibility study steps followed by the
WB are shown in following.
Country Assistance Strategy: Under its current development policy, the bank helps
governments take the lead in preparing and implementing development strategies in the belief
that programs that are owned by the country, with widespread stakeholder support, have a greater
chance of success. The bank prepares lending and advisory services, based on the selectivity
framework and areas of comparative advantage, targeted to country poverty reduction efforts.
Identification: Projects that can be funded as part of the agreed development are identified.
For tailoring bidding documents to the project concerned, the bank prepare an outline of the
basic elements of the project, its proposed objective, likely risks, alternative scenarios to
conducting the project, and a likely timetable for the project approval process.
Preparation: This part of the process is driven by the country that the Bank is working with
and can take from a few months to three years, depending on the complexity of the project being
proposed. The Bank provides policy analysis and project advice along with financial assistance
where requested. During this period, the technical, institutional, economic, environmental, and
financial issues facing the project are studied and addressed.
Appraisal: The bank assesses the economic, technical, institutional, financial, environmental,
and social aspects of the project. The project appraisal document and draft legal documents are
Negotiations and Broad Approval: The bank and the country that is seeking to borrow the
funds negotiate on loan or credit agreement. Both sides come to an agreement on the terms and
conditions of the loan.
Implementation and Supervision: The borrower implements the project. The bank ensures
that the loan proceeds are used for the loan purposes with due regard for economy, efficiency,
and effectiveness.
Implementation and Completion: The implementation and completion report is prepared to
evaluate the performance of both the bank and the borrower.
Evaluation: The bank prepares an independent audit report and evaluates the project. Analysis
is used for future project design.

Preliminary Design
The Preliminary Design is prepared after complete reception of the topographical and
geotechnical surveys. The horizontal and vertical alignments have been defined as well as
various options of pavement.
The Analysis of the alternatives is based on the following considerations:
Traffic volume considerations
Economic Growth Projects and Assumptions
Potential shifts of vehicular traffic
Economic Considerations
Recommendations on the Best Alternative/Option
In this phase out of the proposed alternative designs best suited is adopted for
implementation .the various criteria considered for adoption of plan includes:
Its construction costs
route length
Connectivity to important places
the route which requires the least land acquisition
minimal negative social and environmental impacts
which facilitates least number of buildings will have to be demolished if any
design with gentlest vertical alignment
In this phase, Preliminary design of reconstructed bridges, hydraulic structures and river
erosion protection structures has to be also carried out. Construction cost estimates are then
derive from the preliminary design. A full maintenance study is conduct with estimates of yearly
maintenance costs for the economic analysis. Economic analysis is performed comparing
discounted yearly benefits to the construction and maintenance costs in the alternatives with and
without upgradation of the highway. Benefits are derived from traffic estimates and vehicle
operating costs previously assessed without 4-lane facility in that rout.

A design report has to be prepared consisting of the following

(a) Preliminary designs

(b) Proposed design basis, standards and specifications
(c) Summary of survey and investigations data
(d) Available Facilities Inventory
Along with relevant drawings including
(a)Location map
(b)Layout plans
(c)Other relevant drawings
(d)Indicative land acquisition plans

Tender Documents / Bill of Quantities

The next phase after banks appraisal is to prepare Tender Documents for the construction
works. A draft has to be handed over to the National Highways Authority of India at the early
stage. The Technical Drawings and the Bill of Quantities, which are part of the Tender
document, are derive from the Preliminary Design of the Feasibility Study. After submission of
the best-suited design, the material specification with estimated cost report has to be prepared;
these will consequently be handed over to the successful bidder of the construction works, for
revision of its price with the final quantities. Advertisements inviting tenders for highway
projects are published in public media stating the type abd brief of work with requirement of
minimum prequalification levels of organizations for the issue of tender documents. These
documents are issued on request, only to appropriately prequalified organizations.

Tender Documents have to be prepared before the invitation of the bids is commenced. The
documents have also to be approved by the National Highways Authority Of India to ensure that:
(a) there is no ambiguity, contradiction, or duplication in the nomenclature of items,
conditions of contract, specifications and drawings;
(b) the specifications and drawings are capable of implementation at site; and
(c) the time stipulated to complete the job is adequate.

Terms of Reference
In this section a brief description of the assignment and its objectives are given prior to the award
of project to the parties.
To conduct Internal Auditors training and guide the Internal Auditor team in conducting
required numbers of internal audits.
To assist in evaluation of implemented ISO 9001:2008 quality management system
through internal audits including closure actions.
To offer close guidance in the preparation and review of final documents prior to
To assist in coordination of required management reviews prior to certification
To guide the ISO project team to take the necessary corrective actions on identified non-
conformities and final review of documents
To co-ordinate during final certification of the department and ensure the department is
certified by a select certification body
Efficiency and otherwise of the Inter-State Transport flows and bringing about a barrier
free transport environment.
To review Tax rationalization and other efficiency parameters.
Strengthening the public transport system in the country
Steps in Procurement
Procurement procedure usually follows the following steps
1. Preparation of Bid Documents
2. Approval of Bid Documents by National Highways Authority Of India
3. Public Invitation for Pre-qualification (where relevant)
Issue of Instructions and Pre-qualification criteria
Pre-Application Meeting and Issue of Clarifications to Applicants
Receipt of PQ applications and scrutiny
Approval to PQ
4. Invitation for Bids
5. Issue of Bid documents to prospective bidders
6. Pre Bid Meeting and Issue of Minutes, Clarifications and Common Set of Deviations
7. Receipt of Bids
8. Scrutiny
9.Acceptance of Bids

Tendering process
It is the phase of project, which involves action to perform bidding by interested contractors in
order to win the contract by responding to tenders with their capabilities and skills formation
consists of the following steps
Information to Consultants
Letter of Invitation
Submission of Firms Credentials.
Submission of Technical Proposal.
submission of Financial proposal.
Terms of Reference
Draft Form of Contract

Information to Consultants
In this phase communication is made to the bidders by means of public notice. A brief
description of the work to be done and other related information are provided, such as location ,
duration , project cost, amount of earnest money , performance guarantee etc. it provides all
necessary information regarding the various terms and conditions imposed by the NHAI, process
of submission of offer, time and format.

Letter of Invitation
In this phase, Bids are invited from consulting firms in form of a proposal for providing
consulting services required for the project. Wide publicity must be given to the Bid Invitation
Notice. Tenders must be invited in the most open and public manner possible, by advertisement
in the Press and by notice in English/Hindi and regional language newspapers of the concerned
District/ State or National Levels as may be applicable. The notice-inviting tender is also
available in NHAI website in addition to the invitation in the press, where the important or core
information is provided while leading the intending bidders to the detailed tender

Time Period for Bids

Period given for submission of Bids should be adequate to enable the bidder make his
investigations, visit the site, carry out his costing, and quote realistically. For domestic Bids this
period may be 30 to 60 days. Usually the period is counted from the publication to the last date
of sale of bid documents.

Sale of Tenders

Tender documents must be kept ready for sale before the issue of Invitation for Bids. The
intending bidders desiring to tender should make a written application and pay the price of the
bid documents in the specified format. Tender documents with complete set of drawings are
made available to the bidders as soon as their applications are received.

Proposal Submission
Interested consultant should submit both technical and financial proposals in two parts
Pre Bid Meeting

A Pre Bid Meeting is held at prior to the opening of the tender, to enable prospective bidders to
seek clarifications about the provisions of the bid and make suggestions about the work and the
bidding conditions.
Bid Security
A bid security or earnest money (Normally 1% of the estimated cost of the work put to tender) is
to accompany the bid by the offerer. This money is to be deposited along with completed tender
in specified format. Unsuccessful bidder can refund their earnest money after award of the work.
Submission and Opening of Bids
The NHAI needs to fix a place and a specific date and time as the deadline for the submission of
tenders. The tender must be submitted in writing, signed and in a sealed envelope as per
stipulations contained in the Bid documents. The tender received after the deadline for the
submission of tender, shall be returned unopened to the bidders who submitted the same. On the
due date and appointed time, as mentioned in the bid document, the NHAI authorized personnel
needs to open the bids in the presence of the intending bidders or their representative. The
bidders name, the bid prices and discount, if any will be announced by the procuring entity
during opening of bids.

Scrutiny of bids

Scrutiny of the 'Financial Bids' is carried out to determine whether each bid has been properly
signed conforms to all the terms, conditions and specifications of the tender documents without
material deviation and reservation. Substantially responsive financial bids are checked for any
arithmetic errors and are to be rectified. . Arithmetic errors includes

difference between the amount of rate in figure and in words

he rate quoted by the bidder in figures and in words tallies, but the amount is not worked
out correctly.

Evaluation of Proposals
The evaluation of the proposals are made only after
(i) correction for errors;
(ii) adjustments for any acceptable variations, deviations and,
(iii) adjustments to reflect any discounts or other modifications offered.
Any variations, deviations, or alterative offers and other factors, which are in excess of the
bidding documents or otherwise result in unsolicited benefits for the Contractor should not be
taken into account in bid evaluation. Duties, taxes and other levies will not be considered in
evaluation of bids. f the bid of the successful bidder is seriously unbalanced in relation to the
estimate of the cost of the work, a detailed price analysis for any or all the items of Bill of
Quantities has to present by the offerer to demonstrate the internal consistency of those prices
with the construction methods and schedule proposed

Acceptance of Bids

At the end of its scrutiny and evaluation of the bids a comparative statement of tenders is
prepared to compare the tenders and in order to ascertain the successful tender in accordance
with the procedures and criteria set forth in the bid documents. The usual criterion stipulated in
tender documents, is to regard a bidder successful if his bid quotes the lowest price subject to any
margin of preference applied pursuant to Government policy. National Highways Authority Of
India shall reserve the right to accept or reject any bid or all bids, recall the tender and to annul
the bidding process, at any time before the award of its work, without thereby incurring any
liability to the affected bidder(s) or any obligation to inform the affected bidder(s) of the grounds
for this action.
Guidelines for Acceptance of Single Tenders1
The following guidelines adopted by NHAI for its works,
In case only a single bid is received by the due date of receipt, normally the bid process
may be cancelled and re-bidding done by giving a shorter notice (say of four weeks)
except in cases where due to other reasons like difficult conditions, law and order etc.,
the tender response is expected to be poor.
In case of re-bidding, change from pre-qualification to post-qualification may also be
considered and resorted to, if that would help increase response of tender.
In case re-bidding/change to post-qualification also results in receipt of single bid then it
should be opened and the bid amount should be compared with the estimated project cost.

National Highway Authority of India : NHAI Works Manual-(2006)
In case the bid amount is within 15% of the estimated cost, then acceptance of the bid
may be considered with proper justification and reasons.
For EPC contracts such single tenders can be considered for acceptance provided if bid is
reasonable and sufficient justifications exist for acceptance.
In cases where due to reasons like difficult conditions, law and order, likelihood of poor
response etc., it is decided to open the single bid without going for re-bidding, then for
acceptance, the above guidelines shall be applicable as are prescribed for acceptance of
tenders where re-bidding is resorted to.

Public Sector Financial Model:

The financial model developed using public sector benchmarks was used to compare the costs to
NHAI under the conventional approach and under the annuity payment based BOT approach.
For this the risks under each of the approaches were evaluated and the value of quantifiable
transferred risks (primarily cost and time overrun) ascertained. The annuity payment is a
payment for performance, in that the payment commences only after the road is built. During the
operations period, the payment is subject to the availability of the road and service quality.
Objective measures for availability lane kilometer hours over the annuity period and riding
quality such as road roughness index, rutting and potholes etc. were developed for this purpose.
Payment of annuity is linked to the road being available to users and appropriate formulae for
deductions for non-availability or inadequate quality have been set out in the contract.
Based on the above, the equivalent annuity for NHAI under the conventional approach was
derived using discounted cash flow analysis.
Value for Money (VfM) = Cost under the Conventional Approach (CCA) - Cost under
the Annuity Approach (CAA)

Private Sector Financial Model:

A financial model for each project was developed incorporating typical private sector estimates
of capital costs of the project, operating costs, periodic maintenance expenses and the cost of
debt finance. The model was used to throw up the of annuity levels for a range of expected
returns on equity (equity IRR) for the project.

Special Purpose Vehicle

SPVs are separate legal entities formed under the Companies Act, 1956.
It involves very less cash support from the NHAI in the form of equity/debt; rest of the funds
comes from Ports/Financial Institutions/beneficiary organisations in the form of equities/debt.
The amount spent on developments of roads/highways is to be recovered in prescribed
concession period by way of collection of toll fee by SPV.

Nearly 80 percent of this equity at the SPV level is infused by the promoters themselves. This is
because due to the lack of exit options at the SPV level, lock-in etc. very few equity providers
are willing to participate at the SPV level.

The SPV enters into a number of contracts with the various parties to the transaction,
a. with NHAI for land acquisition,
b. with the civil contractors for road construction and maintenance,
c. with a specialized agency for toll collection,
d. with a specialized arm of NHAI (insurance function) to buy political and traffic insurance,
e. with a Trusteeship company to act as a security trustee and to protect the ensure that the
interests of the investors by ensuring that the SPV functions as per the mandate at the time of its
f. with a bank for managing any financial risk that may be present in the financing structure and
for adequate liquidity, and
g.with a rating agency to rate the various types of instruments to be offered to the investors to
financially participate in the project.

Concession Agreement:-It is a negotiated contract between a company and a government

that gives the company the right to operate a specific business within the government's
jurisdiction, subject to certain conditions. A concession agreement may also refer to an
agreement between the owner of a facility and the concession owner or concessionaire that
grants the latter exclusive rights to operate a specified business in the facility under specified
conditions. Regardless of the type of concession, the concessionaire usually has to pay the party
that grants it the concession ongoing fees that may either be a fixed amount or a percentage of
The Concessionaire shall be responsible for all defects in the Project Highway for a further
period of 24 (twenty four) months after the Termination of the Concession Period or any
extension thereof and shall have the obligation to rectify at its own cost any defects observed in
the Project Highway including any Project Facilities during the said period failing which
authority shall get the same rectified at the Concessionaires risk and cost and all such costs
shall be paid by the Concessionaire to authority within 7 (seven) days of receipt of demand in
this regard from authority.

In the event of failure of the Concessionaire to effect the payment pursuant to above, to the
authority within the 15 (fifteen) days period set forth therein, authority shall be entitled to
recover the same from the Project Escrow Account and/or the Termination Payment for which
purpose a sum equal to the Fees realisable during the last two year of the Concession Period for a
traffic volume calculated at the rate of 20,000 (twenty thousand) PCUs per day per year shall
notwithstanding anything to the contrary contained in this Agreement, be retained in the Escrow
Account provided that if a Bank Guarantee of an equivalent sum in the form and content
acceptable to authority has been furnished by the Concessionaire to aithority, no such retention
shall be made. Provided further that the Independent Consultant shall carry out an inspection of
the Project Highway at any time within two year before the Termination Date and if it
recommends that the status of the Project Highway is such that a large amount should be retained
in the Escrow Account, then such larger amount as recommended by the Independent Consultant
shall be retained in the Escrow Account.

This Agreement shall not be assigned by the Concessionaire save and except with prior consent
in writing of authority, which consent authority shall be entitled to decline without assigning any
reason whatsoever.

The Concessionaire shall not create nor permit to subsist any encumbrance over or otherwise
transfer or dispose of all or any of its rights and benefits under this Agreement or any Project
Agreements to which Concessionaire is a party except with prior consent in writing of authority,
which consent authority shall be entitled to decline without assigning any reason whatsoever.
If as a result of Change in Law, the Concessionaire suffers an increase in costs or reduction in
net after tax return or other financial burden, the aggregate financial effect of which exceeds
Rs.10 million (Rupees ten million) in any Accounting Year, the Concessionaire may notify
authority and propose amendments to this Agreement so as to put the Concessionaire in the same
financial position as it would have occupied had there been no such Change in Law resulting in
such cost increase, reduction in return or other financial burden as aforesaid. Upon notification
by the Concessionaire as aforesaid, the Parties shall meet as soon as reasonably practicable but
no later than 30 (thirty) days and either agree on amendments to this Agreement or on alternative
arrangements to implement the foregoing.

The Concessionaire will indemnify, defend and hold authority harmless against any and all
proceedings, actions and, third party claims. Authority will, indemnify, defend and hold harmless
the Concessionaire against any and all proceedings, actions, third party claims for loss, damage
and expense of whatever kind and nature arising out of defect in title and/or the rights of
authority in the land comprised in the Site adversely affecting the performance of the
Concessionaires obligations under this Agreement and/or arising out of acts done in discharge
of their lawful functions by authority, its Officers, servants, agents, subsidiaries and contractors .
Events of Default except to the extent that any such claim has arisen due to a negligent act or
omission, breach of contract or breach of statutory duty on the part of the Concessionaire, its
Subsidiaries, affiliates, contractors, servants or agents including due to Concessionaire Event of

The Indemnified Party shall have the right, but not the obligation, to contest, defend and litigate
any claim, action, suit or proceeding by any third party alleged or asserted against such party in
respect of, resulting from, related to or arising out of any matter for which it is entitled to be
indemnified hereunder and their reasonable costs and expenses shall be indemnified by the
Indemnifying Party. If the Indemnifying Party acknowledges in writing its obligation to
indemnify the person indemnified in respect of loss to the full extent, the Indemnifying Party
shall be entitled, at its option, to assume and control the defence of such claim, action, suit or
proceeding liabilities, payments and obligations at its expense and through counsel of its choice
provided it gives prompt notice of its intention to do so to the Indemnified Party and reimburses
the Indemnified Party for the reasonable cost and expenses incurred by the Indemnified Party
prior to the assumption by the Indemnifying Party of such defence. The Indemnifying Party shall
not be entitled to settle or compromise any claim, action, suit or proceeding without the prior
written consent of the Indemnified Party unless the Indemnifying Party provides such security to
the Indemnified Party as shall be reasonably required by the Indemnified Party to secure, the loss
to be indemnified hereunder to the extent so compromised or settled.

The Concessionaire shall have exclusive rights to the use of the Site in accordance with the
provisions of this Agreement and for this purpose it may regulate the entry and use of the Project
Highway by third parties. The Concessionaire shall allow access to, and use of the Site for
telegraph lines, electric lines or such other public purposes as authority may specify. Where such
access or use causes any financial loss to the Concessionaire, it may seek compensation or
damages from such user of the Site as per Applicable Laws.

The Concessionaire shall not be liable to pay any property taxes for the Site. For the purposes of
claiming tax depreciation, the property representing the capital investment made by the
Concessionaire shall be deemed to be acquired and owned by the Concessionaire. The
Concessionaire shall not sublet the whole or any part of the Site save and except as may be
expressly set forth in this Agreement provided however that nothing contained herein shall be
construed or interpreted as restricting the right of the Concessionaire to appoint contractors for
the performance of its obligations hereunder including for operation and maintenance of all or
any part of the Project Highway including Project Facilities.

The agreement also addresses the issues related to dispute resolution, arbitration, disclosure,
redresses of public grievances etc.

Shareholders Agreement:-

A Shareholders Agreement between shareholders of a private limited company is a contract that

details the various provisions that will govern each of the shareholders who are party to the
agreement vis--vis the Company and the shares held by each such shareholder and also the
provisions that will govern the management of the Company as agreed to by the parties to the
agreement. It may be noted that in case of a public limited company, there may be enforceability
issues with certain provisions of the shareholders agreement.
Some of the critical clauses in a typical Shareholders Agreement between shareholders of a
private limited company would be:

1. Representations and warranties from the Company and its Promoters

Any investor who invests in a company would insist on certain representations and warranties
being made by the Company and its promoters about the financial position of the company,
compliance with laws by the company, litigations and claims against the company, assets of the
company, liabilities of the company, status of the shares that are to be issued to/purchase by the
investor and so on. The language of each representation and warranty should be carefully
reviewed and if necessary, negotiated. Any exceptions to such representations and warranties
must also be clearly captured. Promoters may make certain representations and warranties on a
best of their knowledge and belief basis.

2. Composition of Board of directors of the company and other management related matters

The shareholders may agree on the maximum number of directors on the Board, the number of
nominee directors from each party, who will be the chairman of the Board meeting, quorum for
board meeting, whether chairman will have casting vote and other such matters pertaining to the
Board. Matters that require unanimous consent of the directors and matters on which a partys
nominee director shall have veto rights will also be addressed in this clause. By virtue of this
provision, a shareholder may get control of the Board and the decisions of the Company that are
taken at the Board level may also be steered through veto rights.

3. Lock-in/first right of refusal/tag along/drag along

A lock in clause impose restrictions on alienation/sale of shares held in the company by either
party without prior approval of other party for a certain period of time. A First right of refusal
clause makes it obligatory on a shareholders who wants to sell his shareholding, to first offer his
shares to the other shareholder who is party to the Shareholders Agreement on the same terms
and condition on which he proposes to sell it to a third party. If the Shareholders Agreement has
a drag along clause then in the event that one shareholder wishes to sell his shares to a third
party, then he can require the other shareholder who is party to the Shareholders Agreement to
also sell his shares to the same third party on the same terms and conditions. A tag along clause
gives a shareholder the right to insist that his shares also be sold to a third party to whom the
other shareholder proposes to sell his shares, on the same terms and conditions.

3. Restriction further issue of shares, any anti dilution rights, Pre-emptive rights

By these clauses, the Companys right to issue further shares or raise further capital can be
curtailed. Further, pursuant to an anti dilution right, in case the company issues shares to any
other person at a price lower than the price at which a shareholder who is party to the
Shareholders Agreement was issued shares, then the shareholder who is party to the
Shareholders Agreement has the right to receive such additional shares (at no cost to him) so as
to reduce the price per share held by him to the same price as that at which shares were issued to
the other person. A pre-emptive right obligates the Company to offer any future shares that may
be issued, first to the Shareholder (on a pro rate basis) before offering it to any other party and
may allow the shareholder to continue maintaining its shareholding percentage in the Company.

4. Management of the Company

The Shareholders Agreement can have clauses on who will manage the Company on a day to
day basis, how the MD will be appointed and whether company can change or appoint an MD
without concurrence of both parties.

5. Threshold Shareholding

The Shareholders agreement can also specify a minimum shareholding that a party must have in
order to have all the special rights specified in the shareholders agreement.

6. Matters requiring consent of both parties

The Shareholders agreement can also specify matters that will require the consent of both
parties in general meeting (eg. change in capital structure of the Company, fresh issue of capital,
amendment of memorandum and articles of the Company, change in auditors etc.).

7. Indemnification
The Shareholders Agreement may require one of the parties (usually the founders or promoters)
and/or the Company to indemnify the investing shareholder against any breach of representations
and warranties.

8. Non-compete

Usually promoters/founders will be required to undertake that they will not directly or indirectly
engage in or be employed by any party, to carry on similar business as the Company. The period
of non-compete is usually a matter of negotiation.

9. Information rights

Usually any investing shareholder will insist on certain financial information being made
available to such shareholder periodically by the Company, including balance sheets and profit
and loss accounts.

The above are only indicative clauses that may be contained in a shareholders agreement. Apart
from these clauses, the shareholders agreement may contain clauses related to illegality,
termination, restrictive covenant etc.

Generation of working capital and Lenders Agreement

Infrastructure projects are typically capital-intensive and have long gestation periods, and so
require significantly high levels of long-term financing. With the exception perhaps of airports
and ports, which have an international side to their operations (and power projects set up for
cross border sales of the power generated), the earnings of most infrastructure projects (energy,
telecommunication, roads, railways, urban transportation, water supply, sanitation and other
urban infrastructure) are denominated entirely in their respective local currencies. Since projects
of this nature have very little natural hedge, their ability to absorb cross-border financing in
significant volumes is rather limited, more so, given the lack of standard long term foreign
exchange risk hedging products (usually not over 2 years) and little market depth for long-term
swaps in most developing countries. Availability of domestic financing of the required
magnitude is therefore critical to the development of infrastructure in any location.
Since capital markets across developing countries are at different stages of development, the
ability to implement projects either as pure private investments or under public private
partnership (PPP) structures also depends on the domestic finance market in each of these
locations. Where markets are reasonably developed, domestic financing by way of equity and
debt, and to a lesser extent mezzanine finance structures, become common sources of funding for
infrastructure projects. Other locations would still need to access multi-lateral or bilateral credit
sources (including export lines of credit) for funding infrastructure projects, with the exchange
risk absorbed by the government, and so project implementation is usually undertaken by
government authorities directly or through specialised government agencies, although in most
instances, not very effectively.

Availability of domestic finance, of course, is not the only pre-requisite for development of
private infrastructure, though it is certainly a very important one. Other pre-requisites for the
development of a private infrastructure market include putting in place appropriate legal and
policy frameworks, comprehensive project preparation, transparent procurement processes,
equitable concession/ contractual structures, entrepreneurial resources of the required order and
perhaps most importantly, political will in appropriate measure.
This paper broadly reviews the experience of India over the last decade in the development and
financing of private infrastructure projects and the role of a specialised institution, namely,
Infrastructure Development Finance Company Limited (IDFC) in policy advocacy, development
and financing of private infrastructure projects during this period. Admittedly the developments
over the last year which have caused a serious meltdown in global financial markets have altered
the financial landscape for private investment in infrastructure in India.

Financing of Private Infrastructure Projects

The feature of long gestation in infrastructure projects - longer project implementation period
due to their capital intensive nature, issues such as land acquisition and time required to obtain
environmental and other statutory clearances, and the elapse of time to reach operating break
even (especially in transportation and telecom projects), necessitate the provision of long-term
funding to these projects. Further, given their return on equity considerations, private sponsors
seek to maximize the quantum of debt financing for these projects which can vary from levels as
low as 40-50% (telecom and port projects), to more common levels of 60-70% (energy, toll
roads, urban sector projects, airports) and may even go up to 80-90% (projects involving
payment for services by the government authority, for instance road projects where government
pays an annuity over the project life).

Since infrastructure projects are exposed to different types of risks policy and regulatory risks
(tariff setting, competition, legal and policy changes), counter-party risks (for payment when
services are purchased by a government authority or for supply of fuel or other vital inputs),
implementation risks (construction delays, cost overruns and contractor failures), operating risks
(obsolescence, cost variance, inflation and contractor failures) and revenue risks (demand/ traffic
and inflation), among others, project sponsors rarely expose their existing operations and balance
sheets to these risks. Project implementation is undertaken through a special purpose company/
vehicle (SPV) set up exclusively for each project, achieving a bankruptcy-remote structure.

Debt financing for the project is usually raised on non-recourse or in some instances on partial
recourse terms by the SPV with sponsors limiting risk to their equity investment in the SPV or
in some instances by an additional underwriting commitment to cover cost overruns. As a result,
the underlying project contracts (concession agreements, EPC and O&M contracts, fuel supply
agreements, purchase agreements etc) and insurances are assigned to the lenders. The financing
structures and agreements are often elaborate and complex and cash flows secured through
structured escrow/ cash retention agreements, so that financing risks are appropriately mitigated.
The process of raising finance is therefore characterised by intense negotiations between lenders
and sponsors.

Domestic Financing of Private Infrastructure Projects

Private infrastructure projects have been mainly financed by equity and debt funding sources.
Till the late nineties, debt financing in India was provided largely by two main sources
development finance institutions (DFIs) providing long term debt for capital expenditure and
commercial banks providing short term credit to meet the working capital requirements of
projects. The process of economic liberalisation of the early nineties also resulted in increased
exposure of the financial sector to global markets and trends. As a consequence, the distinctions
between DFIs and commercial banks reduced, with IDBI and ICICI eventually converting to
commercial banks. Several new private sector banks also commenced operations and the
propensity of banks to provide long term credit also increased. This was also helped by easy
liquidity conditions that prevailed over much of the last decade.

The bulk of domestic debt financing so far has been provided in the form of senior secured debt
by commercial banks and non-banking finance companies (which include some of the erstwhile
DFIs like IFCI and specialised entities like IDFC) and to a lesser extent by insurance companies.
With the exception of one public bond offering to retail investors, there has been no reliance on
the capital markets. The bulk of the credit is provided in the form of loans which are not easy to
sell down, though issuance of debt securities (more amenable to secondary trading) is popular
with some of the market participants. In practice though, the absence of a deep secondary market
for corporate debt has not enabled sell down and secondary trading in debt instruments of any
significant volume. The few securitisation transactions undertaken have been mainly to refinance
existing debt, taking advantage of a declining interest rate scenario in the period up to 2007.

While projects need long-term funding, the bulk of the financing raised so far has been of a
relatively short term nature, with projects taking on the refinancing risk. Even where loans have
been given for longer tenures (in some cases even upto 12-15 years), they would carry re-pricing
options at shorter intervals of one, three or five years. This would pass on interest rate re-pricing
risks to projects. While this has worked so far, given the current financial crisis and the
increasing expectations from private financing over the next few years, this cannot be sustained.
Passing on the liquidity/ interest-rate risks to projects could, beyond a point, result in a
blowback - severe credit stresses on banks portfolios. It has also been argued that banks (even
the large players) and NBFCs would soon reach their prudential exposure limits both on
account of credit exposure and maturity mismatches, giving little head room for assuming very
significant levels of new exposure in the near-term. It would, therefore, be necessary to bring in
players with the ability to provide long-term liquidity at affordable costs into debt financing.
This issue has been discussed further in the last section of this paper.
Most PPP projects impose a minimum shareholding commitment on sponsors of projects
typically 51% of the equity in the first five years and 26% thereafter. After negotiating with
lenders for the maximum possible leverage, equity capital was, initially, entirely provided by
project sponsors out of their existing balance sheets. There have been instances where minority
equity stakes have been placed with EPC/ O&M contractors for these projects as well as with
strategic investors, who would directly benefit from the projects operations but these have not
been of a significant order. Increased leveraging has also been accomplished through mezzanine
finance (subordinated debt structures), but these too have rarely exceeded 10-15% of the cost of

A common form of raising capital (initially used in the telecom sector) was by investing through
a holding company which allowed significant dilution in the quantum of equity funds to be
invested by sponsors, more so as these became multi-layered. The minority stakes at each level
were funded through private placements with domestic and international private equity and
venture capital funds. As more and more projects got successfully implemented these holding
companies made successful public offerings at impressive valuations particularly in the 2005-
2007 period, which opened new institutional and retail equity funding sources for infrastructure
investment. With the currently depressed state of the equity markets, it would be a while before
the momentum of the earlier years of this decade is regained; however, companies with a good
track record of project implementation could always access markets at appropriate junctures.

The clutch of private equity funds set up for infrastructure over the last few years would now
have opportunities to cherry pick good quality assets; it remains to be seen how committed
many of these would be to investment in India and whether investors would be able to bring in
the committed levels of funding into these funds. A new category of funds targeting
international pension funds and steady return investors, are project equity funds which would
invest directly into SPVs - either in equity or mezzanine products. Such funds, which seek steady
rather than spectacular returns, could also provide equity dilution opportunities to sponsors after
the project is implemented. Since the SPVs are unlikely to list, the funds themselves could list
after a few years to provide exit routes for investors.

For an infrastructure project there is always a chance that things will not turn out exactly
as planned. Thus project risk pertains to the probability of uncertainties of the technical,
schedule and cost outcomes.


-Identify hazard
-Assess probability & consequence

Risk Control measures

Eliminate/substitute Retain
Reduce chance Self finance
Reduce effect

National Highways and Roads as an infrastructure sector have certain key peculiar characteristics
(Law relating to Infrastructure Projects, Author: Piyush Joshi, 2009) which expose this sector to
the high degree of uncertainty and hence risks. Some of the important characteristics are as
Demand Estimation for a road / national highway project cannot be accurately forecasted.
Catchment Area future development affects the demand of a road to a great extent and is beyond
the control of the private player or concessionaire or even in few cases, the government.
Non-recourse debt is not fully effective in the road or national highway project. The main
asset for Special Purpose Vehicle (SPV) in a road project is not worth anything without the
revenue collection. Thus, the lenders are exposed to high degree of commercial risk because in a
road project, the usage of road can fluctuate sharply. Certain level of commercial risk cannot be
mitigated completely.
In India, usage of road has not been linked with Toll in the past. The scenario is changing
recently but the willingness of the commuters to pay toll is not high.
The services provided by a road or national highway project cannot move with the demand. A
shift of residential or commercial centers can shift the traffic volumes from the project.
Land Acquisition in a road project is different from other infrastructure sectors. Failure to
acquire a small portion of the land parcel can delay and hamper the implementation of the

Owing to these peculiar characteristics, it is imperative that roads and national highways as an
infrastructure sector needs strong institution building and comprehensive concession structure.
Weak institution will lead to recurrent delays. In addition, complete dependence on tolling
revenue to recover project cost and service non-recourse debt is not a feasible solution to
increase private participation.

Private sector participation is typically through construction or management contracts and Build-
Operate-Transfer (BOT) contracts. BOT contracts permit tolling on stretches of the NHDP by the
private operator or may also be based on the lowest annuity payment from the Government. In
the current scenario, all projects awarded by NHAI, be it construction / management or BOT, are
through competitive bidding.

Risks and Uncertainty can be differentiated on the basis of ex-ante probability distributions.
Risks reflect situations where the outcomes are unknown but the probability distributions of such
outcomes are known or can be assessed. On the other hand, Uncertainty defines that number of
different values can exist for a quantity but without probability of such values or outcomes are
not known and cannot be assessed.

Like any other infrastructure sector, road or national highway projects are also exposed to risks
related to construction, operation and maintenance.
Risks relating to Route Characteristics / Specifications
Commercial viability of route

Development of parallel or alternate toll free route

Accessibility to the project road

Government reneging regarding a particular route or specifications

Land acquisition / area covered by the route

Provision of adequate traffic disbursal facilities at the ends or around project facility

Risks related to Traffic

Low usage of road

Construction of physical obstruction preventing traffic flow

Diversion of traffic to alternate route

Prevention of a particular type of vehicle affecting traffic flow

Traffic control mechanism affecting traffic

Risks related to Toll

Determination of toll rates

Levy and revision mechanism of toll rates

Collection of tolls

Risks associated with the appropriation of tolls by the concessionaire

To attract investments (domestic and foreign) in the roads and national highways sector in India,
the government has implemented few prominent policy initiatives to strengthen the institution
building aspect by promoting the Public Private Partnership (PPP) on Build, Operate and
Transfer (BOT) basis (Toll and Annuity) or similar basis (BOO, DBFOT, etc.) for the highways
projects. To address the complexities involved in highway projects, a comprehensive risks
mitigation framework has been designed under the name of Model Concession Agreement
This framework addresses the issues which are typically important for limited recourse financing
of infrastructure projects, such as mitigation and unbundling of risks; allocation of risks and
rewards; symmetry of obligations between the principal parties; precision and predictability of
costs and obligations; reduction of transaction costs; force majeure; and termination.

Risks Identification in Various PPP Models

As per the project scope, various risks prevalent in the different PPP models have been
identified. PPP Models selected for this study are BOT Toll, BOT Annuity and Engineering
Procurement & Construction (EPC). In addition, has been considered wherein the impact of
various risks involved has been studied. For simplicity purpose, only four crucial assumptions
have been studied in terms of their correlation and their impact on the project Net Present Value.
The definition of crucial assumptions has been arrived after discussion with the industry

Risks in Various PPP Models

PPP Mode Asset PPP Private Private Player Compensation

Ownership Duration Player Role
(years) Revenue

BOT Toll Public 15 30 High Design, finance, Toll Revenue

manage, maintain
and collect tolls

BOT Annuity Public 15 30 Low - Design, finance, Annuity Revenue

Medium construct,
manage, maintain

BOT Shadow Public 15 30 High Design, finance, Toll Shadow

Toll construct, Revenue
manage, maintain
Management Public 5 Low Management of Pre-determined
Contracts all aspects of fee, based on
operation and performance


As per the study of the scope, various risks prevalent in the different PPP models have been
identified. PPP Models selected for this study are BOT Toll, BOT Annuity and Engineering
Procurement & Construction (EPC). The project methodology encompasses five stages namely:

Stage 01: This stage involved comprehensive understanding of the Indian roads and highways
sector via literature available from the secondary sources and paid reports. It also involved
incorporating learnings gained from the past professional experience.

Stage 02: This stage involved risks identification in the three PPP models i.e. BOT Toll, BOT
Annuity and Engineering Procurement & Construction (EPC) via comprehensive study of the
Model Concessionaire Agreements (MCA) available on the NHAI and PPP India website. In
addition, the name of the bearing party (private or government) and the execution condition
associated with each risk was also identified.

Stage 03: A road project was conceptualized in this stage and a financial model for the same was
built. Secondary and primary research was conducted for this stage. The model was made to be
as robust as possible by inclusion of as many risks as possible.

Stage 04: Industry experts were consulted for the short listing of four risks for conducting the
sensitivity analysis of the model. Evaluation of short listed risks in terms of criticality and impact
on the project NPV was studied in this stage.

Stage 05: A risk management framework is designed in this stage after incorporating feedback
on the above stages.
Two of the commonly used modes of Execution of Road Projects are described:


Pre Completion Risk

1. Land Availability
Bearing party-Government
Granting authority will be liable for enabling access to the Site, free from Encumbrances.
Delay in any case other Force Majeure will invite NHAI paying Concessionaire damages
at the rate of Rs.50 per day per 1000 (one thousand) sq. meters or part thereof if such area
is required by the Concessionaire for Construction Works. Such Damages shall be raised
to Rs.2000 (Rupees two thousand) per month after COD if such area is essential for the
smooth and efficient operation of the Project Highway.
2. Design
Bearing party- Private Player
The concessionaire is required to finalize the design and detailed engineering basis
3. Time and Cost Overruns
Bearing party- Private Player
In the event the concessionaire fails to meet the project milestone, he or she has to pay
damage to NHAI at the rate of Rs.1, 000,000 (Rs. One million) per day until such
milestone is achieve or 0.1% of the performance security amount (which is about 5% of
the total project cost) for each day of delay. However, the damages paid will be refunded
in case the project achieves completion on or before the scheduled completion date.
4. Change in Scope
Bearing party -Private Player / Government
Granting authority will bear all the costs arising out of any change of scope order if the
costs exceed 5% of the total project cost. Otherwise, the costs shall be borne by the
5. Funding
Bearing party -Private Player
Private Player is required to arrange for financing. VGF is available but only to the extent
of 20% of project cost
6. Delay in Financial Closure
Bearing party -Private Player
If the Concessionaire shall fail to achieve Financial Close within the said 180 (one
hundred eighty) days period, the Concessionaire shall be entitled to a further Period of 90
(ninety) days subject to an advance weekly payment by the Concessionaire to NHAI of a
sum of Rs.100, 000 (Rupees one hundred thousand) per week. Beyond 270 days,
concession agreement shall be deemed to have been terminated by mutual agreement of
the parties. The granting authority the right to forfeit the bid security.
7. Incorrect valuation by government authority
Bearing party -Private Player
The Feasibility Report of the Project provided by NHAI is to be taken only as
preliminary reference document by way of assistance to the Bidders who are expected to
carry out their own surveys, investigations and other detailed examination of the project
before submitting their Bids. Nothing contained in the Feasibility Report shall be binding
on the NHAI and it shall have no liability whatsoever in relation to or arising out of any
or all contents of the Feasibility Report.

Post Completion Risk

1. Performance
Bearing party -Private Player
The Concessionaire shall operate and maintain the Project Highway by itself, or through
O&M Contractors and if required, modify, repair or otherwise make improvements to the
Project Highway to comply with Specifications and Standards.
2. Traffic variance and revenue risk
Bearing party -Private Player
In the traffic falls or grows more than 2.5% of the expected traffic growth, MCAs provide
for extension or lowering of the concession period in the event of a higher or lower than
expected growth in traffic. Also, if the traffic grows beyond the traffic cap in a particular
year, the revenues earned beyond the traffic cap level will be submitted in Safety Fund.
For every 1% shortfall in actual traffic compared to target traffic, concession period
increase by 1.5% with Cap on Concession Period Variation as 20%. For every 1% excess
in actual traffic compared to target traffic, concession period decreases by 0.75% with
Cap on Concession Period Variation as 10%.
3. Toll collection
Bearing party -Private Player
Concessionaire will levy and collect Fees from users of the Project Highway at the rates
set forth in the Fee Notification and in accordance with MCA
4. Environmental issues
Bearing party -Private Player / Government
Applicable permits relating to environmental protection and conservation of the site to be
obtained by the granting authority, other applicable permits are to be obtained by the
5. Competing Roads / Routes
Bearing party Government
The granting authority will pay the concessionaire compensation equal to the difference
between the realizable fee and the projected daily fee until the breach is cured.

6. Performance & Design
Bearing party -Private Player
The Private Player is responsible for any technology up gradation during or after
construction phase or during operations phase. The additional cost would be borne by
private player.

7. Interest rate/Inflation
Bearing party -Private Player
The interest rate and inflation risk is factored in the bid value quoted by the private
8. Foreign exchange exposure /Insolvency and outside creditor risk
Bearing party -Private Player
It is borne by the Private Player and is factored in various costs pertaining to
construction, operation and maintenance phase.

Bearing party- Government / Private Player
If Force Majeure happens before financial closure then the date for achieving Financial
Close shall be extended by the period for which such Force Majeure shall subside. Both
parties will bear their respective costs and no Party shall be required to pay to the other
Party any costs arising out of such Force Majeure Event. If Force Majeure happens after
financial close and commercial date of operations (COD), the Concessionaire will
continue to make all reasonable efforts to collect Fees, but if he is unable to collect Fees
during the subsistence of such Force Majeure Event, the Concession Period will be
extended by the period for which collection of Fees remains suspended

9. Change in Law
Bearing party- Government / Private Player
If as a result of Change in Law, the Concessionaire suffers an increase in costs or
reduction in net after tax return or other financial burden or enjoys a reduction in costs or
increase in net after tax return or other financial benefit, the aggregate financial effect of
which exceeds Rs.10 million (Rupees ten million) in any accounting year, the
Concessionaire may notify NHAI and propose amendments to this Agreement so as to
put the Concessionaire in the same financial position as it would have occupied had there
been no such Change in Law
10. Government reneging
Bearing party- Government / Private Player
No pre fixed penalty or compensation decided and it would be mutually decided
depending upon the situation.

Pre Completion Risk

1. Land Availability
Bearing party- Government
NHAI will provide the physical possession of the project site.
2. Design
Bearing party- Private Player
The concessionaire is required to finalize the design and detailed engineering basis
3. Time and Cost Overruns
Bearing party- Private Player
Penalty is attached for not achieving the project schedule (details mentioned in Annuity
Fees point)
4. Funding
Bearing party- Private Player
Private Player is required to arrange for financing.
5. Change in Scope
Bearing party- Private Player / Government
Change in scope with maximum permissible limit of INR 175 million is to be borne by
the concessionaire. Anything beyond the limit will be NHAIs responsibility.

Post Completion Risk

1. Performance
Bearing party- Private Player
The Concessionaire shall operate and maintain the Project Highway by it self, or through
O&M Contractors and if required, modify, repair or otherwise make improvements to the
Project Highway to comply with Specifications and Standards
2. Traffic variance
Bearing party- Government
Granting authority will assume the risk of traffic variance as revenue to concessionaire is
in the form of annuity and is independent on the traffic volume.
3. Toll collection
Bearing party- Government
NHAI will levy, demand, collect and retain the toll fee either by itself or may authorize
any other person to collect fee.
4. Annuity Fees
Bearing party- Government
Annuity payments would be made by NHAI as MCA terms and conditions. Bonus and
penalty are provided for early and delay project completion respectively given by the
following formula: B or R = ((SPCD COD) + X)*A/180 wherein B or R is Bonus /
Reduction, SPCD is Scheduled Project completion date, COD is Commercial Date of
Operations, A is Annuity, X is number of delay days computed by independent engineer.
If COD is achieved between two annuity payments, then B or R = ((PAPD COD) +
X)*A/180 wherein PAPD is Previous Annuity Payment Date
5. Environmental issues
Bearing party- Government / Private Player
Applicable permits relating to environmental protection and conservation of the site to be
obtained by the granting authority, other applicable permits are to be obtained by the
6. Competing Roads / Routes
Bearing party- Government
Private Player is independent of any approval of any competing road or route by NHAI
and is solely dependent on the Annuity.

7. Design & Performance
Bearing party- Private Player
The Private Player is responsible for any technology up gradation during or after
construction phase or during operations phase. The additional cost would be borne by
private player.

8. Interest rate Inflation
Bearing party- Private Player
The interest rate and inflation risk is factored in the annuity quoted by the private player.
9. Foreign exchange exposure & Insolvency and outside creditor risk
Bearing party- Private Player
It is borne by the Private Player and is factored in various costs pertaining to
construction, operation and maintenance phase.

Bearing party- Government / Private Player
The Force Majeure risk would be borne by both parties but it is highly dependent on the
time when force majeure happens i.e. before COD or after COD and whether it is
political or non political force majeure. In case force majeure happens before COD and is
a non political event then NHAI is not obliged to pay anything to Concessionaire. In all
other cases, NHAI would be paying the concessionaire the force majeure payments
dependent upon the type of event.

1. Change in Law
Bearing party- Government / Private Player
If there is an increase in capital expenditure or increase in taxes owing to change in law,
the additional amount shall be allocated and shared between NHAI and Concessionaire
subject to some limit bands. If capital expenditure is upto INR 60 million or increase in
taxes is upto INR 10 million, NHAI would not share any additional cost and all would be
borne by concessionaire. Anything above this limit would be completely borne by NHAI.
2. Government reneging
Bearing party- Government / Private Player
No pre fixed penalty or compensation decided and it would be mutually decided
depending upon the situation.


Land Availability

Stringent Penalty Clause in MCA

Sale Deeds

Speedy review and clearance of Land Acquisition Act

Uniformity in NHA, 1956 and LAA

Defining the parameters of determining the success of

the land acquisition process

Design Based on mutual understanding between private player

and government, appointment of Independent technical
consultant to review the project design and is made the
final authority regarding the design aspect.

Time and Cost Overruns EPC contract to an experienced and reputed firm on
fixed time and cost basis.

Provisions for liquidated damages in the MCA

Change in Scope

Adequate and accurate definition of the project scope

freezed before the project commencement.

Penalty clause to be included in MCA


Comprehensive techno commercial feasibility of the

project to be conducted when approaching investors

Assessment of risk to identify corporate finance versus

project finance

Delay in Financial Closure

Flexibility for the SPV regarding change in ownership

Ensure extensive project rights, structure and

contractual agreements along with risk sharing makes
project viable


Termination clause in case of failure to meet the

performance standards

Escrow Account to solve the issue of excessive cash


Long term O&M contract with operating and

performance commitments

Provision in MCA regarding continuous up gradation in

performance in response to change in demand

Traffic variance and revenue

Short term and counter guarantee by NHAI

Traffic management measures to incentive the users

Environmental issues

Ensure that all the environmental concerns are

addressed including impact assessment before the bid

Involve external agencies to carry out Environmental

impact assessment
Competing Roads / Routes Comprehensive clause in MCA regarding provision of
competing roads for pre determined duration, the
competing roads should not be allowed provided traffic
volumes have not exceeded to certain percentage of
forecasted figures.


EPC contract to an experienced and reputed firm with

suitable warranty and continuing support damages in the

In case of damage, force majeure insurance clause

provision needs to be incorporated

Interest rate

Inflation Swaps and hedging

Foreign exchange exposure Good corporate governance

Insolvency and outside Management competency

creditor risk
Credit appetite and strength of sponsors

Pass the additional cost to the consumers

Force Majeure

Comprehensive insurance policies

Adequate mitigation of risk between both parties

Suspension of performance obligations during the

occurrence of FM event

Change in Law

Government reneging Involvement of MLC for the political risk cover

Formation of independent regulator

The sector involves certain risks like market conditions, legal systems weak institution building,
etc. which makes it imperative for players in this sector to be develop comprehensive risk
framework in order to mitigate, transfer or avoid such risks.

In response to sectors risk exposure to certain risks - from a developers or investors perspective,
it is recommended that issues pertaining to certain clauses in MCA like land acquisition,
environmental clearances, force majeure, etc are addressed more effectively. The formation of an
Independent Regulatory Authority for the sector can possibly address the pricing and award of
project issues raised by the private investors.


This section defines revenues for a highway project, also known as cost recovery, from the
public sector perspective. It presents the sources of revenue available to fund highway projects,
the economic agents within the community from whom those resources will be collected, either
toll payers/road users or tax payers or a combination, and the mechanisms involved.

Road user charges as cost recovery for highway projects

Roads have often been treated as public goods, financed from general taxation rather than
through cost-related charges. In this chapter, we consider the objectives of road user charges and
their implications for the levels and structure of taxes which are generally used as proxies for
direct road charges.

The mechanism of road user charging is discussed in the following sections.

Efficient allocation of resources between sectors

Economic efficiency requires that the user of resources pays the marginal social costs associated
with the use of those resources.

For roads and road transport, this means that no category of vehicle should pay less than
the sum of the following:
The economic cost of the fuel and the other resources consumed in making the trip.
These may be termed the private marginal costs of using the road network.

The marginal road maintenance cost: additional traffic, especially heavy commercial
traffic increase road deterioration and reduces the pavement life and increases the cost of
road maintenance and renewal.

The marginal environmental cost: increased traffic raised the levels of vehicle
emissions, noise pollution, etc. The costs are not borne by the road user but by society,
mainly those people living and working close to the roads

The marginal congestion cost imposed on other vehicles: as vehicle flows increase,
vehicle speeds decline. The individual road user considers only his/her personal time and
cost but their use of the road may well increase the travel time and costs of all users of
that road.

There are recurrent costs associated with road provision and maintenance that are not related to
use and on which the level of vehicle flow has no impact: weather and time related road
maintenance, for example. Such costs should be financed by the means which causes the least
economic and equity distortion.

Efficient use of resources within the road sector:

Another important efficiency dimension in structuring a charging system is to avoid significant

distortions within the sector. In the transport sector, it is important to avoid three distortions:

Distortion between vehicle classes and their users: charges on different categories of
vehicle should appropriately reflect the differences in the costs that they impose on the

Distortion between modes: inappropriate charging structures on different transport

modes, which compete closely for the same types of passenger and freight traffic, can
have a marked negative impact on traffic allocation and economic efficiency.
Distortion between locations: this can occur, if the charging/financing structures
in some states are significantly different to those in others. This may distort decisions on
the location of economic activity or vehicle registration but its impact is probably lower
than for the first two distortions.


There are several dimension of equity that are or may be relevant to the structuring of a road user
charging system:

Horizontal equity: vehicles within the same category, imposing the same costs on
society, should pay the same level of charges.

Vertical equity: charges paid by different vehicle categories should vary in proportion to
the costs that the categories impose.

Distributional equity: this is normally interpreted as requiring charges/taxes to be

progressive, with higher income users paying higher charges.

The Costs to Be Covered by Road User Charges

There is a broad consensus regarding the costs that should be covered by road user charges with
the exception of whether investment in new or improved roads should be financed exclusively by
present road users.

Full road maintenance costs

For efficiency reasons, all vehicles should be required to meet the full costs of road maintenance
which are attributable to their use of the road network. Such maintenance includes not only the
day-to-day routine maintenance (repairing potholes, for example) but also the more periodic
resealing and strengthening of the pavements.
There are some costs of road maintenance which are not variable with use and cannot be strictly
attributed to specific vehicle categories, but costs nevertheless which need to be financed. Two
broad approaches might be adopted to finance these non-attributable costs:

(a)Equity distribution approach: the higher income groups, primarily car owners, should finance
the costs through higher charges (higher charges on gasoline) as they benefit from the road
network and can afford to pay higher charges;

(b)Economic pricing approach: the fixed costs should be financed by charges which impose the
least distortion on the use of the road network. Such charges could be set by:

An annual vehicle license fee: once paid, there would be no impact on the individuals
decisions as to whether to use the network, the cost of the marginal trip would not be

Charges established through Ramsey pricing principles: to minimize the impact on total
use, the additional charges necessary to cover the fixed costs should be set in inverse
proportion to the demand elasticity. Higher charges would thus be established for those
vehicle categories with the lowest travel demand elasticity.

System administration costs.

The costs involved in managing road use (traffic police, traffic signaling, etc.), in collecting the
various user charges and in enforcing their payment, should also be met by users.

Environmental and other externality costs.

In principle, the monetary cost of environmental impacts should also be included in the costs
which should be recovered from users. These externalities include global and local air pollution,
and road accidents.

Congestion costs
Road congestion pricing is now being given much wider consideration; Singapore has had
congestion pricing for many years, and London introduced a central area congestion charge in

Capital investment costs.

The treatment of investment costs for new or improved roads is theoretically more difficult. It is
agreed that road users should not be charged for the vast investment that has already been made
in the road network, it is a more a question of whether road users should pay for the investment
which is now being made in expanding and improving the network; whether road users should
pay simply the short-run marginal costs or a longer run marginal costs including the capacity
expansion cost.

A normal business, expanding too rapidly to finance capital expansion from revenues, resorts to
borrowing. The annual capital charge may then be set to service the debt on the capital
investment. Where the road system is well established, and its size is not growing rapidly,
current year capital expenditure and the appropriate servicing charge for capital may be
approximately equal. That is the presumption made in road cost accounting in some of the
industrialized countries such as the United Kingdom.

In periods of very rapid growth of the capital in the network, as envisaged in the next decade in
India, the annual investment costs are likely to exceed the correct capital charge. Trying to
recoup these capital costs from current revenue is likely to inhibit the desired rate of investment
as well as impose substantial costs on road users. Furthermore, while the efficiency objective
requires that all categories of users pay at least the marginal social costs of their use of roads, it
does not necessarily require that the full current year costs of investment expenditures be
recovered from current users; this would put the burden of a long-term strategy excessively and
unnecessarily on the current generation. Hence it is recommended that, in accordance with
normal commercial principles, it should be the annual servicing charge on the capital employed
that should be recovered from users, and not the current years capital expenditure. However, if
the political decision is made to raise capital finance from vehicle related charges, then this
revenue should, as far as possible be raised from vehicle related charges (based on attributable
costs) with, as far as possible, a zero marginal tax impact.

A recent European Conference of Ministers of Transport report analyzed this complex issue. Its
conclusion was that 100% coverage of infrastructure expenditures by transport user charges
alone is not an appropriate basis for ensuring efficiency. In the rail sector, increasing returns to
scale mean that marginal social costs will be below average costs and transfers from general
taxation will be required to cover total costs. In contrast, in the road sector, marginal social costs
may vary greatly depending on the level of congestion and other externalities. Hence, marginal
social cost pricing in the road sector may result in surplus revenues in some urban areas (of the
order of 150%) but under recovery in rural areas.

Suitable Tax and Charging Instruments

A range of instruments has been used internationally to tax/charge users for road-related costs.
An important defining characteristic of these charges is their proximity to the point of use the
directness of the tax. The range of instruments, their prevalence internationally, and a rough
categorization by directness is shown in Figure 4.1. In general, for practical and political reasons,
most countries still use relatively indirect tax instruments; however, this is changing as
technology has developed and public pressure has grown to link charges more directly with use.

Figure 4.1: Tax/Charging Instruments Applied to the Road Sector

fuel taxes, annual license fees, and tolls are likely to form the backbone of the revenue stream for
the highway network, in the future, they are now explored in more detail. In addition, a brief
description is also given of some new user charging initiatives that have been developed to
overcome the disadvantages of previous charging instruments.

Fuel taxes

Both developed and developing countries rely on fuel taxation as the major source of taxation to
finance road sector needs. Fuel taxation is also a major source of general government revenue. In
India, gasoline, and less so diesel, are already subject to higher tax rates than other commodities.

Fuel tax as an instrument in a well-structured road tax regime has many attractions.

It is fiscally efficient (cheap to collect, low evasion, etc.). It can be collected at the
refinery and/or point of distribution and good records can be maintained to ensure

Limited impact on demand due to low price elasticity.

Relatively progressive as travel demand is usually income elastic.

Reasonably good measure for distance related costs as fuel consumption is highly
correlated with the distance traveled; thus reasonably fair for allocating variable costs
within vehicle categories. Correlated with environmental damage; global warming effects
are fairly directly proportional to the amount of fuel consumed. Where different fuels
have different environmental impacts, e.g. emissions of particulate matter, differential
levels of taxation can be levied.

Annual vehicle licenses

Many countries use annual license fees as both a policing/control measure and as a means to
supplement fuel taxes for road user charging. The great advantage of vehicle licenses is that they
can discriminate within vehicle categories as well as between vehicle categories. They can, for
example, discriminate within the car category by weight or power and within the heavy
commercial vehicle category by weight and/or axle configuration. Vehicle licenses are thus a
very flexible instrument for road user charging.

Road tolls

All tolls deter traffic and will discourage some trips of positive value if the toll levels are set at
levels above social marginal cost. However, in aggregate, the imposition of higher toll levels
may increase total economic welfare in three circumstances.

Where the toll is necessary to finance, or accelerate, the provision of a facility which
would not otherwise be provided.

Where the tolled facility is itself congested and the toll secures a more optimal level of
utilization (fewer users, moving more quickly).

Where the whole system including the tolled road and alternative untolled routes is
Where a new toll financed route is provided, which would not have existed without tolling, both
the traffic on the tolled route and those users remaining on the untolled route benefit, when
compared with the situation of only the untolled facility. However, when an existing route is
tolled, without any extra capacity or service quality, users with higher values of time will benefit
and users with lower value of time will be worse off.

When tolls are imposed on existing facilities, in addition to existing levels of taxation, they will
obviously increase the total revenue raised from road users. When the additional revenue is used
to improve the network (additional capacity and/or better maintenance) road users may still be
better off than without the tolls. This impact is often not recognized by road users and
governments need to ensure that, when introducing a general toll regime on major links,
sufficient attention is given to explaining to road users how the toll revenues will be used and
what benefits will accrue.

What level of toll is acceptable to users? The answer is often given in terms of the proportion
of the net benefits which are captured as tolls. A more scientific answer can be sought by
considering the motivations for choice. The users of new tolled facilities demonstrate, by their
choice of route, that they value their time and other savings more than the cost of the toll.
Conversely, those who choose not to use the tolled road are demonstrating that they value the
potential benefits less than the cost of the toll (though they may still benefit from lower traffic on
the untolled road and thus increased speeds and higher service standards). Theoretically, social
welfare will be maximized when the toll is set at the level which maximizes the total net benefits
to both sets of users plus the profit (or loss) to the toll road operator.

Weight/distance charges

A serious deficiency in the road tax structure exists in Relation to heavy commercial vehicles.
The road damage costs more steeply with weight than fuel consumption and thus the tax/charges
on the fuel used. Many countries compensate with annual vehicle fees, but these are imperfect
charges for use-related costs. A more efficient solution is the introduction of a weight-distance
charge for heavy goods vehicles.
Advances in communication technology and the ready availability of GPS is leading to even
more developments in road-user charges, especially in Western Europe, with commercial vehicle
charges related to not just weight and distances but also the category of road used. There are now
discussions in the UK to extend this type of approach to all vehicles and totally restructure
vehicle taxation, substantially reducing fixed charges and fuel taxes and relying on direct pricing
for road use.

Simple Charging Structures

The tradeoffs to be considered in relation to the use of weight/distance charges represent an

example of a broader problem: striking a balance between the practical and the theoretically
efficient. This is very important when designing a robust road user charge system; simple
structures ease administration, reduce administrative costs, reduce tax evasion, and lower the
costs of compliance. Complexity encourages evasion, lowers the probability of detection and
reduces transport revenue collection.

There are also substantial benefits to charging close to the point of use; this allows
pricing signals to be perceived more easily and more directly by road users and enhances the
incentives for rational choice in travel demand. There is thus a tradeoff between imposing
charges that closely reflect the social marginal cost of use (and are perceived by users as
reflecting the costs they impose) and using instruments that are cost effective to collect and

Payment to the private sector

Private firms involved in PPP are obviously very concerned about how they will receive the
payments that cover the costs of their investment, including annual operating and maintenance
costs. Contracts are often long-term and private firms will be very reluctant to embark on the
project if they are not convinced that the funds will be provided and will be sourced from stable

It is important to distinguish the concepts of revenues (eg toll collection) and payments to the
private sector, since they are not necessarily linked.
For example, it is not always in the public sector's interest to transfer the commercial risk to a
private operator. It is possible to engage a private firm to collect tolls on behalf of the
Government, which then pays the road operator. The toll collector and the road operator can
even be the same company, but in such a case, cash flows are kept separate and remuneration of
the operator is not related to the revenue collected. Payment of private firms by the public sector,
although leaving the commercial risk outside the operator's responsibility, does not prevent
efficiency incentives being included in the contract agreement (performance-based contracts).
Such contractual provisions are often used in the mass transit sector.