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A Project Report on

Case Study of Mumbai-Pune Expressway And Coimbatore Bypass

submitted in partial fulfillment of the requirements of the course

Infrastructure Development and Financing


Prof. G. Raghuram


by :

Harish Diwakar Ramasamy Maharnav Patir L.Sridhar Vinod Kumar R.S


24 th August 2001

Harish Diwakar Ramasamy Maharnav Patir L.Sridhar Vinod Kumar R.S on 24 th August 2001 Institute Of




Ahmedaba d

Executive Summary

The case of MSRDC and Coimbatore Bypass shows that the present policy of attracting private participants has many caveats. Chief among them is the financing schemes of the projects where the government has gone for a BOT contract and has allowed the private participant to recover their investment through toll collection. At present toll collection in India is not a viable proposition due to various socio economic problems. Private companies are unwilling to invest due to the perceived risk due to problems in estimating traffic density and willingness to pay. There is also the issue of bundling in making certain projects financially viable. There is also no clarity as to the sharing of risk in such projects and as to that is responsible if the project turns out to be financially unviable at a later stage. There is also the issue of project structuring to reduce the overall risk and make the project attractive for private investor. This project has looked into the various alternate financing schemes for road sector projects and has recommended the use of both BOT and the Central Road Fund in India. The government should go for BOT projects with private players where the private participants feel the project is financially viable and their investment could be recovered through tolling. The Central Road Fund should be used in projects which government feels is important for uniform dispersal of development but there are no takers from the private sector. Government should not bundle these projects, which have no takers along with other financially viable projects and complicate the project structure. The identification of feasible projects should be left to the private sector rather than government going with a set of projects and asking private sector to choose one among them. The report also suggests certain procedures regarding the managing of the central road fund, which could be followed for efficient utilisation of the fund.



Public private partnership in the road sector:


Objective of the project:


Mumbai Pune expressway




Feasibility study




Project management consultants


Award of contract


Facilities to contractor


Financing of the project


Organizational structure and operational characteristics of MSRDC


Coimbatore bypass project






Learning from the above two cases


Issues concerned with toll roads:


Alternatives to toll roads:


Criteria for selection:


Shadow tolling:


Annuity based scheme


Road Fund and BOT Scheme


Quasi public-private enterprise:






Managing road fund:




Bibliography Exhibit 1: Government policy initiatives

Bibliography Exhibit 1: Government policy initiatives



Exhibit II: Construction details of Mumbai pune expressway 31 Exhibit III: Special features of construction (Mumbai Pune

Expressway) Exhibit IV: Special features of the contract (Mumbai pune expressway)

Expressway) Exhibit IV: Special features of the contract (Mumbai pune expressway)




The importance of the road sector in India cannot be underestimated. It is one of the key factors in the economic and social development of the nation. India with 33,00,000 km of roads has the third largest network of roadways in the world half of which are unsurfaced roads. As per economist 1% growth in infrastructure leads to an equivalent growth of 1% in the GDP. We are aiming for a GDP growth rate of 9 % in the future. Hence the infrastructure sector should also grow at this rate. But the figures have so far been disappointing. Road transportation in India carries 80% of the passenger traffic and 60% 1 of the goods traffic. Due to the cross subsidization in the railway sector (the cost of subsidy on passenger travel being loaded on the freight transportation), more freight traffic is being diverted to the road sector. Moreover the state and national and state highways, which carry 70% of all passenger and freight traffic in India, constitute a mere 1,80,000 km or just 6 percent of this total network and of these the national highways constitute only 2 per cent but carries 40 per cent of total traffic. 2 Moreover the vehicular traffic in India is growing at a rate of 10% while the road sector in India is growing at 6%. Compounding the problem of under capacity in the physical infrastructure of transportation has been the perceived inability to finance, manage and create new infrastructure. The inadequacies and deficiencies in the road sector affect the global dispersal of development and affect global competitiveness. In light of the growing evidence of such shortcomings the transportation sector was declared a priority sector for privatization. This was seen as the best strategy for addressing deficiencies and to:

??Minimize the ever-increasing gap between demand and supply for investment capital, technological know how and human capital in the infrastructure sector through private participation. ??Eliminate bureaucratic delays and other administrative bottlenecks so that that the time frame between conceptualization and completion of a project is reduced. ??Optimal utilization of funds that are available as well as private sector finance companies and international funding agencies like Asian Development Bank and International Finance Corporation.

1 National Highway Authority of India Official website. Article network-htm

The road sector was declared an industry in 1994 and it was decided to amend the National Highway Act. This declaration if of great importance because this now allows companies to generate revenues through bonds, levy tolls and allow the private sector to participate in infrastructure construction on a BOT basis. It has also allowed 100 per cent foreign equity participation and given the rights to the private sector to develop services and rest areas along the roads. Companies involved in BOT projects can avail of a 100 per cent tax holiday for five years and a 30 per cent tax holiday for another five years. The financing mechanism will mainly involve enhanced budgetary allocation from the government (by levying cess on petrol, diesels and through tolls on major trunk roads), through external funding from ADB, World Bank etc., by setting up its own companies (as for e.g., MSRDC in Maharashtra) and allowing then to borrow from the market, through BOT schemes, setting up SPVs (special purpose vehicles) and annuity. The key government policy initiatives are summarized in Exhibit 1

Public private partnership in the road sector:

The spiraling cost of infrastructure investment is growing beyond government resources. Hence only a partnership of private and public capital can help bridge the infrastructure gap, particularly in cash strapped developing countries like India. Public Private Partnerships (PPPs) are essentially partnerships between public sector organizations and private sector investors and businesses for the purpose of designing, planning, financing, constructing and operating infrastructure projects. Here the government stops being the owner of assets and becomes the procurer of services. A project is typically defined as a public-private partnership or venture when the private participant takes up two or more phases of the overall project. These phases may be planning, financing, design, construction, supervision, maintenance, service or project management. The Government of India embarked upon an ambitious plan for attracting private sector involvement in the road sector in 1990. Since independence India relied heavily on the public sector for

economic development funding its activities with budget allocations through national and state planning. Public sector companies were owned by the state and national governments. Thus the new policy to privatize represents a significant departure. The role of the government is till significant in this regard. Before the reforms took shape the government was responsible for raising the capital for any infrastructure development. The management of these companies undertaking the development and operational issues of the roads were answerable only to the government and all. At present the structure that currently exist for the road sector development is of public private partnership where every aspect of the project is equitably divided between the government and the private company. The salient characteristics of this new structure are ??The companies in this sector are formed and promoted through the initiative of government. ??The government provides the seed capital and key management personnel are selected from existing government organizations/ departments. ??Funds are raised through public bond issues, as and when required for specific projects, which are traded on the stock market. Investments are attracted from private financial institutions as well as the general public. Governments provide the necessary guarantees for such bond issues. The public corporation is entrusted with responsibility for overall management of the projects. ??Most of the functions related to construction, operation and maintenance are contracted out to large and small companies, which could be from private or public or even cooperative sector. ??These joint sector companies have some popular support, from consumers as well as investors. Involvement of people in the public companies can generate relatively greater accountability towards consumers as well as investors. ??These joint sector companies have relatively more independence, flexibility, and dynamism than the conventional public sector. They are similar to private sector companies in their management approach and work in a networked relationship with other participating companies.

Objective of the project:

This project mainly aims to study the efforts of the government in resolving long- standing issues relating to the viability and feasibility of private sector investment in the road sector through two case studies ??The Mumbai pune expressway in Maharashtra ??The Coimbattore bypass in Tamilnadu Efforts will be taken to bring in the learnings from these two cases for future reference in the public and private involvement in road sector financing in India. Also we intend to analyze the various alternatives that are available for financing road sector development in India and give recommendation after evaluating all these alternatives.

Mumbai Pune expressway


The need for the Mumbai-Pune expressway was established by a study conducted by the ministry of surface transport (MOST) during the seventh five-year plan (1985-90) which identified this corridor as amongst the three most congested national highway corridors and proposed it to be developed, as a part of the "National Expressway System". Accordingly, it was decided to explore the possibility of providing a new expressway between Pune and Mumbai.The need for constructing the Mumbai Pune express highway was borne by the fact that Mumbai was commercial capital of India and pune was developing into a major industrial and commercial center. The vehicular traffic in the Mumbai thane pune belt was 60755 PCU in the year 1996 and is expected to reach 100000 PCU by the year 2004 requiring a ten-lane corridor between Mumbai and pune. 3 This belt also contains 72 per cent of factories, provides 77 per cent of industrial employment, control 88 per cent of working capital, and yielded 86 per cent of total state industrial output. More recently this link between Pune and Mumbai has become crucial

for the development of the computer and information sector that is perceived to be a key element in facilitating globalization and international business linkages. The distance between the two cities is some 180 km and it takes about four and a half to five hours to cover it under good traffic conditions. However due to flooding and landslides in the Western Ghats the roads get frequently and unpredictably paralyzed by accidents, which block the narrow and winding curves of the two-lane highway. These increase the traveling time to somewhere around 10 to 15 hours. At present 400 persons are killed due to accidents on the existing Mumbai-Pune National Highway each year. 4

Feasibility study

In 1990, the Government of Maharashtra appointed RITES and Scott Wilson Kirkpatrick of UK to carry out feasibility studies for the new Expressway to be operated on toll basis. Important findings of the feasibility study are as given below ??RITES recommended the construction of a dual three-lane expressway taking of from the NH4 at Kon near Panvel and ending at Dehu Road on the westerly

bypass outside Pune —

a total length of 84 km.

??Project cost, as estimated by RITES at 1994 prices, was Rs 11,464 million. ??RITES estimated that the diversion of traffic to the new expressway would be the order of 40-45 percent of the total corridor traffic. ??The EIRR for the project was 17.81 percent, which is above the planning commission’s cut-off rate of 12 percent. Hence, the expressway project, as envisaged by RITES, was economically viable. ??RITES recommended that subsidy might come from income through property development on the land in the vicinity of the expressway.


After the recommendations were accepted; tender documents for the expressway were prepared and bids invited by the Maharashtra public works department (PWD). Six corporations purchased the tender documents but only one, the Reliance Corporation,

submitted a bid. The Reliance bid was for Rs 3,600 crore, a sum more than twice the currently anticipated cost of the expressway and the government did not accept it. It is difficult to pinpoint why the Reliance bid was so high. Factors that could have driven up the bid price can be speculated. Potential costs for hold-ups to the project by the environmental lobbies could be one. The unexpected decline in real estate demand leading to reduction of real estate values throughout the Mumbai-Pune belt, the cost of raising capital needed to acquire high end construction equipment, non-availability of government subsidies, the overall size and cost of the project and uncertainty that tolls would provide sufficient pay back in the stipulated time frame, could be other factors that deterred private companies. Finally the government entrusted the work of constructing the road to MSRDC. The MSRDC was set up in Maharashtra to expedite work related to road sector development in the state on a BOT scheme. After that a committee was set up to look into the geometric standards and technical provisions to de adopted for the construction of the highway. The committee finally recommended the construction of a rigid pavement, which would have an incremental sot of 6% over the flexible pavement but was more economical. MSRDC started a series of meetings with the concerned authorities and departments so that work could be completed expeditiously and in time. Maharashtra State Electricity Board (MSEB) was persuaded to complete the shifting of the electrical and transmission lines. The revenue department was requested to expedite the work of land acquisition; forest and other departments were urged to expedite forest and environment clearances. The project required 646 ha of land for right of way, 455 ha of land for quarry and dumping area and 1338 ha for real estate development. Appropriate reservations were also required for real estate land so that the land could generate surplus revenue. Land acquisition and forest clearance was initiated and accordingly forest and environment clearances were received in October 1997 and November 1997, respectively. The choice of concrete technology and the large size of the project as well as the relatively short time in which the work was to be completed necessitated the use of highly automated, sophisticated equipment and high quality construction materials. Modern machinery used in the project includes high capacity cone crushers, sand-manufacturing machines, computer controlled automated batching plants and laser guided slipform pavers. This level of quality and speed would be impossible

without automation. Equipment costing Rs 300 crore was purchased for achieving this fast track construction. 5

Project management consultants

It was decided to employ a panel of PMCs to carry out detailed engineering design and estimate and supervise the construction work. The PMCs were selected on the basis of marks allotted with weight age of 80 percent on the technical and 20 percent on the financial offer. A condition was put that a PMC will not be allowed to undertake work of more than one section. The minimum technical supervisory staff was also insisted upon. Based on the detailed designs and estimates prepared by the PMCs, MSRDC invited bids from contractors for the construction of the expressway.

Award of contract

The PMCs evaluated the bids from the contractors and an exhaustive technical evaluation was carried out. Marks were distributed on various aspects like for example, experience on similar works; record of early completions/delays; availability of machinery and qualified personnel; quality of works executed; proposed work plan, etc. Bids were ranked by assigning 25 percent weightage to technical scores and 75 percent weightage to the financial bid. Work orders to the contractors were issued in January 1998. The work of tunneling was awarded to Konkan Railway Corporation Ltd, on a turnkey and cost plus basis.

Facilities to contractor

MSRDC provided a number of facilities to contractors such as providing land for labour camps, quarries, electric supply for construction activities; locating petrol pumps adjacent to the alignment; removal/diversion of utility services such as telephone/water/sewer lines coming on the alignment; obtaining permission for tree cutting; ensuring availability of survey/laboratory equipment at site; and ensuring requisite site communication facilities. A number of facilities were also given to PMCs. The different sections of the Mumbai pune express highway and their respective consultants and their contractors are shown in Exhibit 2. The special features of construction are given in Exhibit 3 and the special features of the contract are shown in Exhibit 4

5 Online Article

Financing of the project

In October 1997, preliminary estimate of the project was prepared. It was assessed that

the total cost of the expressway would be about Rs 1630 crore. Almost all tenders were

received within the estimated cost (Rs 1488 crores) 6 . As this is a BOT project, cost of

land acquisition and shifting of certain utilities was borne directly by the government.

In order to subsidize the project, the government has given 1,030 hectares of land, which

is to be used to generate surplus income and make the project financially viable. The cost

of the work is to be recovered from the toll being levied on vehicles using the road. A

request was made to the government to give guarantee for the finances to be obtained

from financial institutions. This was essential since MSRDC is a newly formed company

with an equity output of only Rs 5 crore. It was therefore thought that with government

guarantee and project strength, MSRDC would be in a position to get funds from

financial institutions through private placement financing. Through private placements,

Rs 2120.81 crores was obtained which was also meant for the flyover projects in


Organizational structure and operational characteristics of MSRDC

The organisational structure and management strategy of MSRDC appears to be like

modern autonomous business corporations. There was a dynamic approach to collection,

transmission and free flow of information within the organization. Many activities of a

project were carried out simultaneously as for example the land survey was concurrently

taken up with the task of selecting PMCs so that as soon as the PMCs were selected the,

the survey data could be provided to them. Similarly, each PMC and contractor could

plan the construction of various sections of the expressway independently, in

coordination with other agencies, as well as keeping with the overall framework. There

was parallel information processing, networking and decentralized decision-making

strategies and transparency established. All units involved in the project such as the

6 Maharashtra state road development corporation

PMCs, contractor’s site and main offices and MSRDC offices were connected with a networked computerized system so that problems could be tracked easily and decisions could be taken immediately and that decision is reflected everywhere. Inter-related processes such as material inventory, ordering, store control, manpower and machinery requirements, measurement and certification of completed work, accounting, billing and cash flow management are linked in this network. Any information regarding delays, shortages of material, manpower or resources can be tracked continuously and corrective measures can be taken immediately. There was a well-defined criterion for selecting PMCs and contractors and it maintained a customer-service provide relationship with the PMCS. While it had the right to choose the PMCs and contractors depending upon the organisational structure, price and service provided it was also answerable to the public for the efficient and early completion of the project, as it had raised money through bonds. MSRDC is also looking at various other alternatives for financing the project. Some of these are: (a) tapping the benefit from the real estate development along the transport corridor (b) Imposing tax on petrol and diesel fuel to raise needed capital. (c) Raising a cess on the wage bill of corporations in the beneficiary zone. MSRDC is also looking at laying telecommunications ducts along various roads and bridges including the expressway, which can be rented out to private telecommunications agency.

Critical review of Mumbai pune expressway:

The Mumbai pune express highway is considered to be a success story and hence other state governments are closely watching the activities of MSRDC. It is considered to be the finest example of public private partnership in road sector development. But the very aim of attracting aim of involving a full private participant failed in these case as not even a single international infrastructure company bid for the project and only one Indian company, reliance, bid for the project inspite of many incentives provided by the government like the guaranteed 20% return on investment, a promise of rapid and single window approval, tax incentives and reduced duties on imported equipment for all investments in industry, and, allowing up to 40 per cent government support to the project, not a single international infrastructure company bid for the project. Private sector entrepreneurs are allowed to recover their investments first, followed by the

government. The government finally did not accept any of the competitive bids and the responsibility for constructing the road and its subsequent management was entrusted to the MSRDC 1997. A number of reasons may be cited for the failure to attract private participants. Foremost among them is the uncertainty related with toll-based system where the developers are themselves responsible for recovering their investment. Private participants are unsure as to if they would be able to recover their investment due to uncertainty in traffic density and attendant risk. And also due to the fluctuations in real estate cost the valuation of subsidy through free allotment of land by the government is difficult. The later part of this paper would try to look at various alternatives to BOT scheme, which may help in attracting more private participants to road sector development.

Coimbatore bypass project


Coimbatore is a prosperous and industrial city of Tamil Nadu, is well connected by National and State highways. The National Highway No.47 connecting Salem with Kanyakumari via Trissur, Ernakulam, and Thiruvananthapuram in Kerala, passes through the city. Congestion within the city was causing traffic delays and so there was a need for a bypass. The alignment traversing a length of 27.67 kms was finalized and land for a width of 40-45 m was acquired for this purpose in 1974. However construction was delayed due to lack of funds.

Later in September 1995 the Ministry of Surface Transport in its initiative to foster private participation in road infrastructure floated a global tender to select a private party for development of this project on BOT basis. L&T Transport Infrastructure was the only party, which responded to the tender and submitted a bid. But the L&T ‘s bid was a conditional one, which was based on the addition of a bridge over the Attupalam Bridge on NH47 with in the City outskirts and a ROB on NH-209. These according to L&T were

included to improve the financial viability of the project. The bid was discussed in detail with the State Government by the MoST and finally the bridge across Noyal River was also included in the project. It is important to note here that the GoTN was involved only in the finalization of bid. The cost of the project including the bridge was estimated to be Rs.90 crores. L&T Transportation Infrastructure Ltd was given a concession period of 21 years for the bridge and 32 years in the case of the bypass to collect toll. The following Toll structure was fixed initially in the concession agreement.

Category of

Toll on the bridge for Old and New

Toll on bypass for part use Rs/trip

Toll on bypass for full use Rs/trip














MAV/Heavy Trucks




Auto rickshaws. Two wheelers and slow moving vehicles were exempt from paying tolls.

The work on the project was commenced on December 1997 and Attupalam Bridge was opened for transport in December 1998 and the bypass was opened to traffic on 2000.

L&T started collecting tolls from the day of commissioning (tolls were collected both on the new as well as old bridge) but faced resistance to payment from public, mainly on the bridge. The state transport corporations together with the local truck and taxi owners have expressed their unwillingness to pay toll on the bridge. They were demanding concession

rates for frequent users and opposing the tolling of old bridge. However the compliance

on the bypass was better. L&T made several representations to the government regarding

their loss due to poor compliance. The state government in an attempt to resolve this

issue proposed introduction of concessional rates Rs.50 per day for government and

private buses and Rs.300 per month for all non-commercial vehicles in January 1999.

However, the suggestions were not accepted by L&T and it insisted on retaining the old

rates as agreed in the original agreement. But agreed to the subsidized toll rate of Rs 50

per day per bus of TN Transport Corporation irrespective of the number of trips the buses

will do provided the state government compensated the revenue losses sustained by the

company. The company is said to have made a loss of 20000 Rs per day on government

buses alone during 1999. Financial institutions which had lent 60 crore to L&T started

putting pressure on L&T and its financial losses turned out to be 9 crores per year

including interest charges 7 . L&T expressed its inability to enforce toll collection and on

request the State police was deployed. This didn’t improve the toll collection in any

significant way and L&T reported a loss of Rs.7.4 crores in June 2000 and requested for

compensation. But GoTN was of the opinion that the loss could have been contained to

Rs.55 lakhs, if L&T had agreed to the concessional rates suggested by them.

L&T tried to enforce toll collection further with the help of police but this resulted in the

whole issue being politicized. Local political parties with vested interested organized a

city wide making the issue more complex.


Public consultation:

No studies for demand or willingness to pay was carried out before deciding to include

the bridge also in the project. Nor were there any public consultation or discussion with

opinion makers were carried out.

Delays due to toll collection:

7 The Financial Express official website Online Article:

The tolling has increased traffic delays and public look upon this as a hindrance rather than any improvement of service. Local Traffic:

Since the bridge is within the city limits there is huge local traffic and therefore repeat trips are high. This has made the toll collection difficult because the agreement provides for toll collection on every trip and the public is not willing to pay on each and every trip. Toll on existing bridge:

The agreement provides for toll collection on the old two-lane bridge also. After the completion of the new bridge, each bridge is now being used uni-directionally. This has resulted in public objection for tolling the old bridge for which L&T has not made any investment.

Learning from the above two cases

In both the above two cases we see that only one private party bid for the project inspite of many incentives provided by the government. This problem mainly stems from deficiency in project structuring. In the case of Mumbai pune expressway we see that only Reliance bid for the project and that too they quoted an amount, which was unacceptable to the government. In the case of Coimbatore bypass only L&T bid for the project with the condition that the Attupalam Bridge should also be bundled with the project though the bridge is geometrically not a part of the bypass to make it financially feasible. A number of reasons may be cited for the failure to attract private participants. Foremost among them is the uncertainty related with toll-based system where the developers are themselves responsible for recovering their investment. Private participants are unsure as to if they would be able to recover their investment due to uncertainty in traffic density and attendant risk. And also due to the fluctuations in real estate cost the valuation of subsidy through free allotment of land by the government is difficult. This shows the need to change the project structuring and to look for alternatives schemes to finance the project. We will be looking at various alternatives to finance road sector development and involve private participants. But first of all lets look at the objectives behind tolling of roads and the issues concerned with it

Simply put toll-pricing means asking the people for usage of the road. Toll pricing can have many objectives

??If the road has been built by a private enterprise or is the result of a public private joint venture then road tolls may be implemented to recover the capital invested and for generation of additional profits. ??Road tolls may also be implemented for much needed investment capital for new infrastructure development and hence bridge the gap between demand and supply. ??Road tolls may be implemented for optimal and proper usage of the road so that the road does not attract excess users. When a commodity is too cheap it will be over consumed and hence lead to supply side constraints. ??In may western countries road tolls have been introduced as a mechanism for reducing auto dependence among the people. There are also other targeted pricing mechanism like smog fees to reduce pollution, weight/distance charges to promote lighter vehicles, congestion pricing, gas taxes and fines to meet a variety of objectives. ??The efficiency of road tolls depends on its design and its implementation. Road tolls if designed in the wrong way may hurt the poorer section of the society. Moreover if implemented at the wrong place it may divert traffic away from the toll road and cause congestion at some other road. Moreover it has been observed in many western countries that there are huge congestion near tollbooths, which drive up the stress level leading to accidents, road rage and wastage of gasoline. ??Therefore much thinking needs to be done while designing the road toll. These are some of the important steps that are needed to be taken ??The tolls collected should be income and tax progressive so the poorer sections of the society are not hurt. ??The toll should be done on a geographically widespread basis so that dislocation of traffic does not take place. They should be part of an overall transportation plan instead of being negotiated on a road-by-road basis. It should be publicly controlled and mandated to direct revenues to alternative modes of transportation.

Issues concerned with toll roads:

Toll fixing and increments: As the future vehicular density and the willingness to pay cannot be estimated accurately there is problem is fixing toll charge on roads. As in the case of Coimbatore Bypass the no consideration was made for people’s willingness to pay and demand for the bridge. This resulted in public opposition to toll collection. Access control: Toll roads have to be access controlled. In India due to the prevalent political and social systems access control will be very difficult to maintain. The chances of people defaulting on their payment are high. This raises problems for the private participant in toll collection and thus the project may ultimately turn out to be unviable for the private player as seen in the case of L&T in the Coimbatore bypass case. There is also the cost of monitoring toll plazas to prevent revenue leakage. Flow of traffic: One of the prime objectives of toll roads is to reduce congestion. In India toll charges, as an instrument to manage the flow of traffic is not viable as there are hardly any other alternative route connecting two places. In such cases the toll charge becomes a user charge for providing a service. Moreover even in case where alternatives are available people unwilling to pay tolls may be unwilling to take the new road and this will defeat the purpose of reducing congestion in the old road. Social impacts: In a country like India where a large section of the population leaves below the poverty line, implementing toll collection on roads effectively prevents them from using that service. This necessitates the creation of alternative routes as for example the creation of several underpasses in the case of Mumbai Pune Expressway. There is cost to providing underpass for people not having access to motorized vehicular traffic. Moreover the income and price elasticity for vehicular demand in India is still very high. Hence there is no need to impose toll charges to reduce dependence on traveling by personal vehicles. Political opposition: Political opposition to tolling has been observed in many countries. The opposition has meant that toll rates have not been increased as planned or untolled facilities have been created to provide an alternative. Both this outcomes have affect the financial viability of the project negatively thus driving private participants away.

Alternatives to toll roads:

Criteria for selection:

Any financing plan for the road sector development should be long term, on a legal basis and should fulfill the following criteria

??The financing scheme should take into account the demand potential demand for road traffic and the people’s willingness to pay. In a country like India people willingness to pay become all the more important since any clash between the service provider and the customer might take a political turn as in the case of Coimbattore bypass.

??Private participation in India cannot be totally ruled out as the road funds itself may not be able to bridge the gap between the demand and supply for roads. But the present system of involving private participants in road sector development needs to be overhauled as there are many loopholes mainly related to the recovery fund invested by the private participants and the sharing of risk which in itself is related to the traffic density and peoples willingness to pay.

??The road sector development should also take into consideration the varied political, social and economic atmosphere in different parts of the country. As for example if we take the case of the north-eastern region it would be totally foolish to leave the road sector development to the private sector as few would be willing to invest there due to the political and economic atmosphere prevailing there.

The MSRDC and the Coimbatore bypass case show that there are lots of loopholes in implementing toll roads. The uncertainty attached with revenue generation is keeping private participants from investing in road sector development. The government does not provide any traffic density and attendant risk and hence they shy away from such projects. Moreover the present tolling scheme has got lot of problems attached with it as

mentioned above. So far of the 54000 NHDP projects only 1000 crore has materialized through the BOT scheme. The next section of this paper tries to identify the various alternatives available and their evaluation.

Shadow tolling:

Shadow tolling refers to the policy of paying the private investor a variable revenue stream over time depending upon the usage of the road. The revenue stream depends upon the types of vehicle plying on the road and the distance traveled. The type of vehicles (heavy or light) may be detected through electronic sensors that are positioned at predetermined places. Shadow tolling does not affect the behavior of the users because they don’t have to pay any tolls. Therefore it eliminates the problem of traffic diversion due to tolling and thus in turn reducing congestion and environmental pollution. It also eliminates the problem of discrimination against region or communities. Funds for shadow tolls can come from diverse (and multiple) government and/or private sector sources, including national and state Highway Funds, special assessments on nearby properties and regional dedicated tax streams. The main objective of this purpose is to transfer the responsibly and the associated risks of construction, operations, maintenance and traffic density to the private participants. Thus the prime objectives of shadow tolling may be summarized as

??Traffic risk can be transferred to the private participant

??Traffic levels are not impaired by real tolls or toll increases and hence the problems of traffic diversion and road congestion are eliminated

??Multiple sources of revenues can be drawn upon to contribute to a shadow toll fund

??Project cost obligations to the public sector sponsor (capital, maintenance and operations) can be reasonably known in advance and guaranteed for a particular traffic level.

Feasibility of shadow tolling in India:

Shadow based tolling is not feasible in India simply for the fact that private participants are not ready to take up all the risks. These risks are mainly associated with the uncertainty involved in traffic density, which cannot be explicitly projected. The constant revenue stream, which has been promised to the private participant, has to come from sources like road funds or special tax assessments on users. Hence shadow based tolling is just another form of cross subsidization, which will be hard implementing unless the problems associated with managing road funds are eliminated. These are problems associated with the collection, administration and disbursements of funds from the government to the private participant. It also involves setting up of expensive mechanical vehicle estimation points which may lead to harassment of road users and corruption on part of the regulating body. The unpredictable income stream may also be unpopular with long-term financiers. There may also be manipulation of road traffic on higher side by the promoter to maximize income.

Annuity based scheme

This at present is considered to be the most viable scheme for attracting private participants. Due to the lukewarm response to its BOT scheme the National Highway Authority of India is actively pursuing this alternative. Since most of the private participants are risk averse the annuity scheme provides an attractive proposition to the private participants to invest in the road sector. This scheme guarantees a fixed income to the private participant every year during the concession period. This fixed revenue is meant to cover the debt servicing cost borne by the private entity, operational and maintenance cost and a reasonable return of equity to the private participant. The investor also finds it easier to raise resources, as there is a guaranteed return on equity. Thus the private participant is delinked from the risk associated with uncertainty in traffic density and problems in collecting toll. There are two methods two finance this scheme so as to provide a constant income to the private participant

??In the first method the government takes up the responsibility of collecting the tolls and provides a constant income to the private participant from the revenue

generated through tolls. This scheme is not viable as these have the same problems that are associated with direct tolling of the users by the private participants and the uncertainty in predicting traffic density.

??A dedicated Central Road Fund is created and the private participant is paid through revenues generated through this fund. A Central Road Fund also exists in India, which has been created by levying 1 Rs. on petrol and High Speed Diesel for the National Highway Development Project (NHDP). This is expected to generate 60 billion Rs. per year. But there are lots of political bottlenecks in the administration and management of this fund. There are also the usual problems related with disbursement of funds. Even then these system of financing is very effective because it attracts private partnerships through guaranteed financial returns and the problems associated with tolling and shadow tolling is not associated with this problem.

Annuity based tolling has its own sets of problems. The foremost question is if the dedicated central road fund is enough to finance all the annuity-based projects. There is also the problem of leakage of funds and the management and the distribution of funds. There is also the problem if uniform development of roads throughout India can be carried out totally through annuity-based scheme. As for example private participants may not at all be willing to venture into the northeast regions even if they are sure of a premium and secure return on investment due to the political climate prevailing out there.

Road Fund and BOT Scheme

Another alternative is to allow the private participant to invest in all those projects that they feel are financially viable on a BOT basis. The private participant will recover his investment by levying tolls. The cost of land acquisition, environmental clearance, shifting of utilities and other legal issues will be borne by the government so as to make the project more attractive to private participants. All other risks like the risks involved with traffic density, toll collection, interest rate fluctuation, foreign exchange fluctuation etc will be borne by the private participant. The government will delink itself from the

project after the initial work of structuring the bid and offering the project to a private participant is over. The central road fund will be used to develop all those areas where the private parties are not willing to venture. An important step here will be to fence the road fund so that money is not withdrawn from the funds for other purposes since in India there are many competing investments. The prime issue here will be the management and disbursement of funds.

This alternative has the advantage of the both the government and the private participant actively participating in road sector development. With investment from the private sector coming in areas, which they feel, are financially feasible, the government will have more funds left for development of relatively backward and financially unviable region. But even if the private sector invests, those roads will have the same problem of tolling. The private participant will have to go for accurate demand estimation of traffic density and willingness to pay.

Quasi public-private enterprise:

As seen in the case of Mumbai-pune expressway, the government can set up an independent organization like the MSRDC to take up the financing and the construction of the roads. Here again the government will lay down the initial seed capital and the organization will have representatives from the government. The enterprise will have the organizational and operational characteristics of a private firm so as to establish efficiency, transparency and speed in project execution. The enterprise can raise money through equity or through placements of bonds. It will recover its investments through tolling. This alternative will have all the problems associated with tolling as mentioned above and thus not fulfill the objective of attracting private investment.


After evaluating all the options we feel that the best alternative is the financing of road sector is through a two-tier scheme combining both BOT contract with the private sector and the use of the Central Road Fund.


The government in 1999-2000 imposed a Re 1 cess on petrol in 1998-99 and the same on high-speed diesel. The collection out of this cess goes into a non-lapsable, non- diversionary Central Road Fund for the ambitious Rs 60,000-crore national highway programme. The fund was formally created last year after Parliament cleared the Central Road Fund Bill, 2000. The government later imposed an additional cess of RS.0.3 on petrol and diesel to generate Rs 2,000 crore per annum which is proposed to be used for the 7,300-km long north-south-east-west corridor project alone. 8 However these alone will not be sufficient to develop an effective road system in India as a large proportion of villages are still without all-weather road connections. Most of the roads comprise of one lane and in a number of urban areas, there is heavy congestion on roads and lack of adequate mass transport system and the consequent explosion of the personalized modes of transport (mainly two wheelers) has resulted in low speed, high energy consumption, traffic jams as well as high levels of air and noise pollution and alarming rate of accidents. Also it is very obvious that the provision of such a large network will not be feasible with the road fund alone but also the participation of private sector (Ninth five- year plan report (97-02). 9

The two-tier scheme will finance part of the road sector development through the central road fund and the other through BOT contract with the private sector. The private sector will recover their financing schemes by levying tolls on the roads they have built for the concession period. The following guidelines should be followed in the two-tier scheme

??The private sector should be allowed to invest in all those projects only which they feel are financially viable and will give them an adequate return on investment. The risk of traffic density and willingness to pay should be completely passed on to the private participant. This means it is the responsibility of the private participant for estimating the demand for the toll by taking into

8 The Economic Times official Website. Official Website

9 9 National Informatics Center official website. Online Article:

consideration the political, social and economic climate of the region. The private participant will have the full responsibility for selecting, designing and operating the project. All the principal risk like demand side risk should be transferred to the private participant.

??The government may here encourage private participation by bearing the cost of acquisition of land, shifting of utilities and the cost of environmental and legal clearance. The government and the private participant will have to mutually agree upon the return on investment upon the return on investment which will determine the period of concession. Hence the concession period and the technical qualification of the private participants should be the sole criteria for evaluating the bid process. The toll charge will be determined by the private participation based on the demand for the road and the willingness to pay. Other incentives like safeguard from foreign exchange fluctuations and reduction in custom duties on imported equipments may be done on a project-to-project basis.

??The Central Road Fund should be used for all those projects where no private players are willing to invest. Private sector investment in India is still at an infancy state and hence the government still has an important role to play. Such investment may be in projects, which the government feels are strategically important, or projects pertaining to the universal dispersal of road sector development. The investment in such projects may be carried out by the by setting up an independent and commercial firm for managing the central road fund. The key issue here will be the management of the Central Road Fund.

Managing road fund:

The road funds should not be simply a loosely managed off-budget accounts. They should be based on a set of important design principles and should be fenced from all other competing budgetary requirements. Decision should also be made as to for what purpose the road funds will be used. The road funds may be used to finance only national highways or it may also be used to finance state and rural roads.

If the road fund is only going to finance main roads, it could be managed through a separate division in the NHAI (as in South Africa). On the other hand, if it is going to finance a number of different roads, it should be managed through a separate road fund administration (to avoid any conflict of interest). The road fund should be overseen by a representative board, which could either be a separate board, or a sub-committee of the board, which oversees management of the road network. Members should ideally be nominated by the constituencies they represent like representatives of bus and lorry owners association, regional representative (state wise) and there should be an independent chairperson. The road fund revenues should be collected using a simple two-part tariff consisting primarily of an access fee (vehicle license fees and Road tax) and a user fee (like the current system of levy on fuel and fines for overloading). The tariff should be designed to ensure it does not abstract revenues away from other sectors. Road users should finance extra spending on roads through extra payments, i.e., the extra revenues must be in addition to all pre-existing taxes going into the consolidated fund. There should be a consistent procedure for regularly raising and lowering the road tariff. Since there will often be concerns that tariff increases - particularly increases in the fuel levy - may have adverse repercussions on the consumer price index and hence on the economy. The board may need to examine the impact of proposed increases in the fuel levy on the economy. Problems may also arise due to the use of diesel by other sectors like manufacturing.


We feel that for a resource scarce country like India government alone will not be able to support the huge requirements of infrastructure projects. So government should actively pursue to attract private sector investments to this sector by simplifying the projects with clarity in regulation and clearances and by reducing externalities. We have attempted to come out with certain guidelines based on the learnings from the cases and other sources, which could be used as pointers towards future private-public partnership projects.


Government of India, Ministry of Finance, Economic division: Economic Survey 2000-


Hassan Abul, M. IAS. Coimbatore Bypass Experiences, Pointers to the Future Public Private Partnership Projects.

Hassan Abul, M. IAS. A Note on Toll Collection in Coimbatore Attupalam Bridge.

Raghuram, G., et al., Infrastructure Development and Financing, Towards a Public- Private Partnership. Ahmedabad: Indian Institute of Management.

3iNetwork, India Infrastructure Report 2001, Issues In Regulation and Market Structure

Internet Documents

“Annuity based returns for roads to lure private sector.” Online: Article 02.htm

Bongirwar, P.L and Momain, S.S.”Theme: the Mumbai pune expressway: From concept to commissioning.” 2ka.htm

June 2000

“Concession agreement”. Online: National Highway Authority of India

Dandekar, C Hemlata and Mahajan, Sulakshana.”MSRDC and Mumbai Pune Expressway: A sustainable model for privatizing construction of physical infrastructure”.

17 February 2001

“Roads and highways: toll roads.” Online: World Bank

“Shift to annuity based tolling for roads.” Online: Article

28 February 2000

“TIDCO-Indian policies-Indian infrastructure-National Highways Policy.” Online:

TIDCO policy_asp

“Government policy initiatives.” Online: National Highway Authority of India

“Annuity based returns for roads to lure private sector.” Online: Article 02.htm

“MSRDC-Mumbai Pune Expressway Project.” Online: MSRDC

“History crosses Mumbai Pune Highway.” Online: Article 18030.html

8 May ,1999

“The Mumbai Pune expressway.” Online: Article


Venkataraman, Kavita and Raman, TMA. L&T may pull out of Coimbatore bypass project. Online Article:

October 29, 1999

Raman, TMA.L&T looking for partner to divest equity in Coimbatore bypass. Online Article:

October 22, 1998

Exhibit 1: Government policy initiatives

Policy Initiatives for Attractive Foreign / Private Investment

1. Government will carry out all preparatory work including land acquisition and utility removal. Right of way (ROW) to be made available to concessionaires free from all encumbrances.

2. NHAI / GOI to provide capital grant up to 40% of project cost to enhance viability on a case to case basis

3. 100% tax exemption for 5 years and 30% relief for next 5 years. May be availed of in 20 years.

4. Concession period allowed up to 30 years

5. Foreign direct investment up to 100% equity partners for construction of roads and bridges.

6. Arbitration and Conciliation Act 1996 based on UNICTRAL provisions.

7. The Housing and Real Estate development which is an integral part of the Highway project will be treated as infrastructure and will be entitled for same tax benefits

8. NHAI permitted to participate in equity in BOT projects upto 30% of total acre.

9. Almost duty free import of modern high capacity equipment of highway construction.

10. Private sector allowed to retain toll money.

11. Strengthening of Central Road Fund. Its final format should ensure that the cesses and other charges like tolls are domiciled in a non-diversionary fund.

12. NHAI to look at highways as a service rather than only from the point of view of construction. Safety, performance and operational indices to be incorporated in tender documents.

Exhibit II: Construction details of Mumbai pune


Section-wise details and names of PMCs and contractors involved in the project






Name of

Name of







Rs crore

Rs crore



Section A







(Kon to




with Hyder


Section B







(Chowk to







Co, Mumb





Pvt Ltd


Section C






Larsen &





(India) Pvt





Section D





Sir Owen


(Ozarde to













Package I:







Adoshi to


Pallonji &



Co, with


(India) Ltd



Asai joint








Larsen &

II: Long



tunnel to




(India) Ltd














Package I:




0/0 to












II: 8/200



to 9/750












work 5












Toll plaza,







s' fees, etc




Maharashtra State Road Development Corporation

Exhibit III: Special features of construction (Mumbai

Pune Expressway)

The Mumbai-Pune expressway has several special construction features, which are briefly elaborated below.

• Under each contract, the total length assigned to a contractor was 16 to 20 km, which can be conveniently managed by him.

•Each section has got independent number of access and each side is accessible by adjoining roads.

•Several quarries were available within the stretch and the average lead works out to 3 to 4 km, which indirectly reduces the burden on the contractor.

•Useful materials available from cutting like stone, the contractor without any extra charges/cost can use murum, etc.

•All the structures on expressway are simple in nature, except viaducts in Section B having height of 20 m and above.

•Shortage of construction material including cement was not anticipated.

•The total formation width is about 45 m, and as such sufficient workspace is available to the contractor for deploying large number of construction equipment.

•Most of the work to be done using heavy machinery considering work volume and time limit.

Indian Concrete journal official website

Exhibit IV: Special features of the contract (Mumbai

pune expressway)

The contract was based on the FIDIC format, which is generally adopted on international contracts of World Bank-aided projects. The FIDIC format has been modified to suit the special requirements of this project. Some of the important provisions in the contract are highlighted below.

•As a measure to cover financial risks of the contractors, the contract provided for payment of price variation as per a pre-determined formula linked to various price-related indices.

•As a further measure of risk coverage, the contract provides for full reimbursement of customs duty paid by the contractor for importing construction machinery necessary for the work.

•Foreign exchange fluctuations in respect of the exchange spent for purchase of construction equipment would also be borne by MSRDC.

•The contracts have a provision for payment of bonus to the contractors for early completion at the rate of Rs 20 lakh per week of

early completion. It has also a provision for levy of penalty of Rs 30 lakh per week of delay in completion.

•Early payment of the contractor’s bills has been guaranteed and delay in payment of certified bills beyond 10 days would entitle the contractor to an interest of 15 percent on undisbursed amount.

•Mobilization advance of 10 percent and machinery advance of 5 percent is allowed to the contractor at 15 percent interest.

•Contractors have been exempted from payment of royalties on construction material used on this project.

•Simple dispute redressal mechanism was evolved.

•In case of abandonment of work or termination of contract, the balance work need not be carried out at the risk and cost of the contractor.

Indian Concrete journal official website