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Financing National Highways in India

1. Road Network in India

1.1. India has hierarchal network of roads aggregating to 3.3 million km which
is second largest road network in world after USA. This comprises
(i) Expressway - 100 km
(ii) National Highways - 65,570 km
(including 100 km of Expressway)
(iii) State Highways - 128,000 km
(iv) Major District Roads - 470,000 km
(v) Others District & Village Roads - 2,650,000 km
1.2 Development, maintenance and operation of National Highways
(including Expressways) is responsibility of the Central Government through
Ministry of Shipping, Road Transport and Highways (MoS,RT&H) and
implementation has been/ is (also) being done through respective State
Governments as the agents of Central Government. The development and
maintenance of State Highways and other State Roads is the responsibility of
concerned State Governments. Some State Governments have also developed
expressway corridors in their states.

1.3 There has been gradual shift of passenger and freight passenger traffic
from rail to road, in the last five decades and presently road carry 85% of
passenger and 70% of freight traffic. During this period there has been virtual
boom in vehicular population in India particularly since mid 1980s and presently
there are more than 70 million vehicles. It comprises following percentage of
various vehicle types:

(i) Two-wheelers - 71%


(ii) Cars/ Vans/ Jeeps - 15%
(iii) Goods Vehicles - 5%
(iv) Buses - 1%
(v) Others - 8%

By Mr. A. P. Bahadur, Chief Engineer, Ministry of Shipping, Road Transport &


Highways, Government of India

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The other vehicles have significant proportion of 8%, in the traffic stream
on Indian roads. This mixed traffic stream with slow moving vehicles throws
additional challenge in planning, design and operation of road network in India.

1.4 The National Highway (NHs) network in India has been suffering from
number of deficiencies such as inadequate capacity, poor geometrics, weak
pavement, old and weak bridge structures and culverts, inadequate system for
signs and markings and absence of safety features. Development of National
Highways, therefore require more attention as they carry 40% of total traffic on
roads despite being less than 2% of total road network in the country. A rough
assessment done about 5 years back indicated that an investment of about
1,65,000 crore (US$ 37 billion) was required for removal of these deficiencies.
Presently, 35% of National Highway network is still having less than 2-lane (7 m
width) carriageway; 55% is having 2-lane carriageway and only 10% is with 4-
lane dual carriageway.

2. Government’s Initiatives for financing of National Highways

2.1 Traditionally financing for development of National Highways in India


was from the normal budgetary resources of Government of India. But the funds
were quite inadequate, to meet the demands; which was mainly due to more
demands from other priority sectors such as health and education.

2.2 In early 1980s, in order to augment the available resources, loans were
taken from multi-lateral agencies viz. World Bank (WB), Asian Development
Bank (ADB) and Japan Bank for International Cooperation (JBIC).

2.3 In early 1990s, Government of India took two major policy decisions.
One was for liberization of economy and other was to encourage Public Private
Partnership (PPP) in road infrastructure. Consequently, requisite legislative and
legal provisions were put in position and incentives also announced.

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2.4 National Highways Act 1956 is the legislative and legal document
governing various aspects of National Highways which is responsibility of
Central Government. The original Act provided for levy of user fee for
temporary bridges, tunnels and ferries on highways. Since the basic promise for
PPP in road sector is the return of investment through levy of user fee, NH Act
1956 was amended in 1992, to make provision for levy of user fee on National
highway sections as well. Subsequently, in 1995, this act was further amended
to make provision that the Central Government may enter into an agreement with
any ‘person’ in relation to the development and maintenance of the whole or any
part of a National Highway. Then, in 1997, Fee Rules were notified by the
Government. Also the procedure for acquisition of land required for
development of National Highways was simplified to make it expeditious.

2.5 In 1997, another major step was the notification of capping fee rates for
various categories of vehicles for use of National Highway sections upgraded
from existing 2-lanes to 4-lanes. These were based on main considerations of
the savings in Vehicle Operating Cost (VOC) accruing to the users, damages
cause by the category of vehicles to the pavement of highways and socio-
economic factor of willingness/ capability to pay the user fee. The notified
capping rates are given in Table 1:

Table 1: Notified Capping Rates


(i) Cars/ Vans/ Jeeps Rs. 0.40 per km (US 1.0
c/km)
(ii) Light Goods Vehicles Rs. 0.70 per km (US 1.6
c/km)
(iii) Trucks and Buses Rs. 1.40 per km (US 3.1
c/km)
(iv) Heavy Construction Machinery and RS. 3.00 per km (US 6.7
Earth Moving Equipment c/km)

These capping user fee rates were at 1997 price level and linked to Whole Sale
Price Index (WPI).

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2.6 In 1988 Government constituted a dedicated implementing agency for
development of National Highways through National Highways Authority of
India Act 1998. Consequently this National Highways Authority of India
(NHAI) was made operational in 1995.

2.7 Government decided to give big thrust to the improvement of National


Highways in the country as an overall policy for infrastructure improvement.
Accordingly National Highways Development Project (NHDP) was launched in
1998 for 4/6 laning of National Highways linking four metro cities of the
country namely, Delhi, Mumbai, Chennai and Kolkata (Golden Quadrilateral –
GQ) and National Highways linking north most part of Srinagar to south most
part of Kannyakumari (North - South Corridor) and National Highways linking
east most part of Silchar to west most part of Porbandar (East - West Corridor).
This involved an investment of around Rs. 54,000 crore (US$ 12 billion).

3. Central Road Fund (CRF)

3.1 The CRF was constituted by setting apart an amount to Rs. 2.64 per litre
out of the custom and central excise duty levied on petrol for the development of
the State Roads on 1st March 1929. The cess was increased from time to time to
meet the challenges of accelerated funding requirement for all categories of
roads in the country the CRF has been revamped in 1998-1999. The fund is non-
lapsable and has been given a statutory status by CRF Act enacted in December
2000.

3.2 Government recognized the need for creating dedicated fund so that
planned upgradation of National Highways network could be taken up.
Therefore the existing CRF was revamped by the Central Road Fund 2000. The
funds for CRF were substantially enhanced through a levy cess, of Rs. 1.00 (~
US 2.2 c) per litre on the sale of High Speed Diesel (HSD) and on petrol. This

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cess was further increased to Rs. 1.50 (~ US 3.3 c) in the year 2004. The
accruals were order of Rs. 5,600 crore (US$ 1.2 b) annually and distributed in
the following proportion:

¾ 50% of cess on High Speed Diesel (HSD) oil for development of


Rural Roads
¾ 50% cess on HSD and total cess on petrol to be allocated as follows:
• 57.5% of such sum on development and maintenance of NHs
• 12.5% of sum for construction of road over/ under bridges
and safety works at unmanned railway crossings
• 30% of sum on development and maintenance of State Roads.
Out of this 10% be reserved by the Central Government for
allocation to States for implementation of State Road
Schemes of Inter State Connectivity and Economic
Importance, to be approved by Central Government.

3.3. Cess on fuel was further increased by Rs. 0.50 (~ US 1.1 c) per litre in the
year 2005-06 which was entirely allocated for development and maintenance of
NHs. The funds earmarked for the NHs are being leveraged for raising the
resources through market borrowing for financing the implementation of NHDP.

3.4 The dedicated funds thus created through levy of cess on fuel has greatly
helped in development of all categories of roads i.e. NHs, State Highways, Other
State Roads and Rural Roads in India. The total amount of cess on petrol and
diesel is about Rs. 9495 crore (US$ 1.23 b) during 2005-06. This amount is
expected to increase to Rs. 12600 crore (US$ 2.80 b) per year from 2006-07.

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4. Financing for Development of National Highways

4.1 Presently, the development and maintenance of NHs is financed by


following modes:
¾ Increased allocation from Government’s General Budgetary
Sources.
¾ Dedicated fund under CRF by levy of cess on fuel
¾ Lending by international institutions:
• World Bank
• ADB
• JBIC
¾ Public Private Partnership (PPP)
• Build Operate and Transfer - BOT (Investment by private
firm and return through levy and retention of user fee)
• Annuity (Investment by private firm and return through
annual payment as per bid)
• Special Purpose Vehicle – SPV (where is equity can be put
by NHAI)
¾ Market Borrowings

4.2 The development and maintenance of NHs which are not covered under
the ongoing and proposed phases of NHDP is financed from budgetary resources
made available to the Ministry as part of overall planning process. The
aggregate length of such NHs is 40,000 kms and the budget provisions available
to the Ministry is of order of Rs. 1500 to 1600 crore (US$ 3.33 b to US$ 3.56 b)
annually.

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5. Future Plan for development of National Highways

5.1 Government of India has decided to give focused attention for


development of infrastructure in the country including inter-alia roads, ports,
maritime, airways, railways and power etc. For this purpose a Committee on
Infrastructure (COI) has been constituted under the Chairmanship of Prime
Minister of India. Regular meetings of this Committee are held to review the
progress of each sector. This Committee approved following programs for
period 2005-2012, for further development of NHs to be taken up under various
phases of ongoing NHDP as shown in Table 2.

Table 2: Various phases of ongoing NHDP

NHDP Particulars Length Investment


Phase (in km) Rs. in Crore
(US$ billion)

Phases I & II Balance work of GQ and EW-NS 9,000 42,000 (9.33)


corridors
Phase III 4-laning 10,000 55,000 (12.22)

Phase IV 2-Laning 20,000 25,000 (5.55)


Phase V 6-laning of selected stretches 5,000 17,500 (3.88)

Phase VI Development of expressways 1,000 15,000 (3.33)

Phase VII Ring roads, Bypasses, Grade Separators, - 15,000 (3.33)


Service roads etc.

Accelerated Road Development Project - 2,500 (0.55)


for North-East region

Total 45,000 1,72,000 (38.22)

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It has been decided that the implementation of NHDP Phase III onward
would mainly through PPP. The modes of delivery could be BOT (Toll), BOT
(Annuity) and Construction Contracts.

5.2 Subsequently, the unit cost of various improvements under different


phases was reviewed to bring it to the current price level. Accordingly outlays
under different modes of delivery envisaged are given in Table 3.

Table 3: Different modes of delivery


NHDP Phase Item CC BOT BOT Total
(Toll) (Annuity)

NHDP – I Length (in km) 1,711 20 7 1,738


(Balance
Work) Cost (Rs. in Cr.) 8,145 581 85 8,811
NHDP – II Length (in km) 4,569 1,237 930** 6,736
(Balance
Work) Cost (Rs. in Cr.) 29,493 8,065 6,064 43,623
NHDP – III Length (in km) - 10,000 - 10,000
Cost (Rs. in Cr.) - 65,197 - 65,197
NHDP – IV Length (in km) - 5,000 15,000** 20,000
Cost (Rs. in Cr.) - 6,950 20,850 27,800
NHDP – V Length (in km) - 6,500 - 6,500
Cost (Rs. in Cr.) - 41,210 - 41,210
NHDP – VI Length (in km) - 1,000 - 1,000
Cost (Rs. in Cr.) - 16,680 - 16,680
NHDP – VII Length (in km) *
Cost (Rs. in Cr.) 2,594 9,638 4,448* 16,680
Total Length (in km) 6,280 23,757 15,937 45,974*
Cost (Rs. in 40,232 1,48,321 31,447 2,20,000
Cr.) [US$] [8.94 b] [32.96 b] [6.98 b] [48.88 b]

* Length to be covered under NHDP VII is yet to be finalized


** To be determined based on budgetary resources and the tolling policy for
two-lane highways.

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6. Financing of NHDP
6.1 NHDP Phase I and Phase II has been financed through cess, assistance
from multi-lateral agencies and through PPP (BOT and SPV) and Phase III to be
implemented on BOT basis. The gist of financing is given in Table 4 below:

Table 4: Gist of Financing


(Rs. in cr.)
Phase Approved Cost
NHDP – I 30,300
Cess and Market borrowings : 18,846 (US$ 4.18 b) [1999 Prices]
External Assistance : 7,862 (US$ 1.74 b) (US$ 6.73)
BOT/ SPV : 3,592 (US$ 0.79 b)
NHDP – II 34,339
Cess and Market borrowings : 23,420 (US$ 5.20 b) [2002 Prices]
External Assistance : 7,609 US$ 1.69 b) (US$ 7.63 b)
BOT/ SPV : 3,310 (US$ 0.73 b)
NHDP – IIIA BOT : 22,000 (US$ 4.88 b) 22,000
[2004 Prices]
(US$ 4.88 b)
Total Cess and Market borrowings : 42,266 (US$ 9.39 b) 86,639
External Assistance : 15,471 (US$ 3.43 b) (US$ 19.25 b)
BOT/ SPV : 28,902 (US$ 6.42 b)

6.2 Government of India has taken loan from World Bank, ADB and JBIC for
an amount aggregating to around US$ 5b for development of National Highways
in India. Some of these loans were taken before starting of NHDP but those NH
stretches eventually became part of NHDP. Now World Bank and ADB have
envinced keen interested for programme lending for viability gap funding of
BOT projects for future phases of NHDP.

6.3 The implementation of NHDP Phases III to VII are now to be on PPP
mode. These may also require the viability gap funding which would be meet
out of the cess. The cess allocation for NHs, for the year 2005-06 was order of
Rs. 3270 crore (US$ 7.26 b), which is now expected to be around Rs. 6690 crore
(US$ 14.86 b) in year 2006-07. The cess money would be used on ongoing
expenditure including construction contracts, annuity repayments, land
acquisition, DPR preparation etc.

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6.4 Additional Budgetary Resources may also be provided for road projects in
the North-Eastern Region (total cost at Rs. 12000 crore – US$ 2.66 b) and
additional projects undertaken during 11th plan (2007-2012). In case, BOT
(Annuity) or Civil Contact mode are adopted for projects for NHDP Phase IV
and Phase VII, additional budgetary allocation would be required.

6.5 NHAI has been leveraging the cess money for the market borrowings.
NHAI has floated the bonds/ debentures and had raised Rs. 8500 crore (US$
1.89 b). However the borrowing limit would have to be prudently fixed now,
keeping in new the revenue from user fee expenses for maintenance, servicing
loan from external sources and the cess money available. The cess may need to
committed upto the year 2029-30 for debt servicing and for payment of annuity.

7. Public Private Partnership (PPP)

7.1 PPP is going to be main mode of delivery for the future phases of National
Highways Development Project. Government has already put in legislative and
legal measures. In 1997, a high powered committee was constituted by the
Government for preparing bid document for PPP projects. Accordingly model
concession agreement were finalized for smaller projects costing upto Rs. 100
crore (US$ 22.22 m) and for major projects costing more than Rs. 100 crore.

7.2 Government also announced incentives for PPP. Main features were:

• Road Sector declared as Industry


• Provision of encumbrance free site for work, i.e Government bears
expenses for land acquisition and pre-construction activities
• Foreign Direct Investment (FDI) upto 100%

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• Capital Subsidy maximum upto 40% on case to case basis to meet
the viability gap funding
• NHAI can put in equity upto 30%
• 100% tax exemption in any consecutive 10 years out of 20 years
• NHAI Bond exempted from Capital Gain tax
• Right to collect and retain revenues from User Fee (Toll)
• Duty free import of modern and high capacity road construction
equipment
• Property development activities to be treated as part of NH
development for tax benefit
• Concession period upto 30 years.
• Procurement Procedure – well defined and transparent
¾ Investor friendly Concession Agreement
¾ International competitive bidding
• Equitable Dispute Resolution Mechanism

7.3 With major thrust on PPP mode of delivery, the Government of India
considered a review of existing model concession agreement to make it more
investor friendly and to provide for more equitable allocation of risks. The
revised model Concession Agreement has following main features:

• The period of concession is project specific but generally 20 years.


• The date on which the concessionaire can commence the
construction on project, can be either the date of financial close or a
mutual agreed earlier date (Appointed Date).
• The Total Project Cost (TPC) which is relevant for termination
payment is least of the following:
¾ A fixed sum specified in bid less Equity Support

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¾ Actual capital cost upon completion less Equity Support
¾ Capital cost less Equity Support as set forth in financial
package
• The project site free from encumbrances upto the 80% of the
requirement, would be handed over to the concessionaire till the
appointed date; otherwise damages @ 0.1% of the performance
security (5% of TPC). The remaining 20% of the project site would
be handed over within in 90 days of appointed date otherwise
damages @ Rs. 50 per day per 1000 sqm. Additional land for
change of scope to be taken by Concessionaire.
• Additional tollway not to be commissioned within (8; depending
upon concession period) year, on which the minimum user fee not
less than 25% higher than the fee on project can be levied.
• Change in scope (increase or deduction) allowed upto 5% of TPC in
any three continuous years and cumulative 20% of TPC during the
concession period.
• Financial close to be achieved within 180 days from date of
agreement. Delay upto further 180 days permitted with penalty @
0.1% of performance security for each day of delay. Termination
due on account of failure to achieve financial close.
• Grant to the concessionaire (upto 40% of TPC) by way of Equity
Support upto 20% of TPC and the balance as operation maintenance
support in quarterly installments.
• The concessionaire can offer to pay premium as well, instead of
asking for a grant.

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• Concessionaire to pay nominal fee of Rs. 1 (US$ 0.02) per annum
upto 10th year of concession period. Thereafter the concession fee
would be 1% of the total releasable fee for the 10th year and
increased by an additional percentage for the subsequent each years.
• The partial traffic risk is covered by the provision that the
concessionaire and the NHAI would agree upon target traffic for
target date (in no case later than 3 years prior to the expiry of
concession period). In case the actual traffic falls short or increases
by more than 2.5% of target traffic, the concession period shall be
modified. For each 1% short fall, concession period to be enhanced
by 1.5% with limit of 20% of concession period. Similarly for each
1% excess, concession period to be reduced by 0.75% but not
exceeding 10% of concession period.
• There is a optional provision for capacity augmentation of exiting 4
laning to 6 laning before 11th year. If Capacity Augmentation is not
done, the concession period gets reduced to 12 years from 20 years.
Notice before 8 years and exit option for each party.
• Concessionaire to operate and maintain the facility. Failure to
repair and rectify any defect or deficiency within specified period
shall be breach. Damages for each day of delay would be higher of
(a) 0.5% of average daily fee and (b) 0.1% of the cost of such repair
or rectification
• Termination payment would be 90% of debt due less insurance
cover, on concessionaire’s default and be debt due plus 150% of
adjusted equity in case of NHAI’s default.
• Three stage dispute resolution mechanism. Mediations by the
Independent Engineer, then amicable settlement through the two
Chief Executives and failing which the arbitration.

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7.4 The response to Government of India’s initiative for PPP on NHs have
been encouraging. Up till now 42 contracts have been awarded covering an
aggregate length of around 2,400 km out of which 7 contracts of length 320 km
have been completed. The average overall grant required has been of the order
of 8% against the allowable limit of 40%. Table 5 gives the summary of BOT
(Toll) based projects:

Table 5: Summary of BOT Toll based Projects


Category Awarded Total Project Annuity Completed
No of Length Cost (Rs. crore) No of Length in
Contracts in km (Rs. crore) Contracts km
NHDP 9 464 3443 718.99 6 287
Phase I (20.88%)
NHDP 16 812.86 5371.06 -103.38 - -
Phase II (-1.92%)
NHDP 17 1090 5752 491.91 1 30
Phase II (8.55%)
Total 42 2356.86 14566.06 1107.61 7 317
(7.6%)
Though allowed upto 40% the overall grant is 7.6%

7.5 Apart from large projects of 4 laning of NH stretches, given in Table 5,


other 25 smaller projects have been take up on BOT for construction of Bridges,
Road Over Bridges, Bypasses and for upgradation of small NH stretches, at an
investment of Rs. 1400 crore (US$ 0.36 b).

7.6 Significant number of National Highway stretches have been taken up


for implementation on BOT (Annuity) basis as given in Table 6:

Table 6: Summary of BOT (Annuity) based Projects


Category Awarded Total Project Annuity Completed
No of Length Cost (Rs. crore) No. of Length
Contracts in km (Rs. crore) Contracts in km
NHDP 8 476 2354 2888 8 476
Phase I (12.23%)
NHDP 4 299 2121 199 - -
Phase II (9.38%)
Total 12 775 4475 487 8 476
(10.88%)

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7.7 The phases I and II of NHDP also includes improvement of connectivity
to 11 major ports in the country. These improvement projects are through
Special Purpose Vehicles (SPVs) where NHAI has put in Equity Support of
30%. Besides some other major projects including around 100 km long
Expressway has also been implementing on SPV route.

7.8 As per the policy of Government, user fee shall be levied on all NHs
section which have been upgraded from existing 2 lanes to 4 lanes, and this levy
would be in perpetuity. The amount collected from levy of user fee on NHs
section upgraded to 4/6 lanes on BOT, shall constitute the return to the
concessionaires on their investment. The fee on NHs section upgraded from
governments budget, would be utilized for maintenance and operations of these
sections. Presently fee being collected from the completed stretches through
public funded projects, is of order of Rs. 793 crores (US$ 176 m) which is
expected to be 1180 crore (US$ 262 m) in the year 2006-07. It is assessed that
the average fee collection would be @ Rs. 50 lakhs (US$ 0.1 m) per km per
annum for NHDP Phase I and Rs. 18 lakhs (US$ 0.04 m) per km per annum for
NHDP Phase II. The operation and maintenance cost on NHs stretches covers
under NHDP Phase I and II estimated cost of Rs. 10 lakhs (US$ 0.2 m) per km
per annum.

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