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The road ahead Highways PPP in India

A. K. Upadhyay, I.A.S. Message Secretary Ministry of Road Transport & Highways Government of India & Chairman, National Highway Authority of India (NHAI)

The Infrastructure industry is one of the fastest growing industries in recent years. The private sector has been playing a pivotal role in the development of this sector. Roads are the most essential part of infrastructure for providing industry and agriculture with the connectivity to markets for growth in production and trade, and more so for improving the quality of life of its citizens. Besides expressways and highways, rural roads programme is also going ahead that aims directly at improving connectivity in our vast rural areas. The Twelfth Plan strategy calls for aggressive participation through Public Private Partnership as much as possible in service of public at large. The National Highways Authority - the nodal agency for ensuring rapid development of roads in the country has made PPP the preferred mode for most of its projects. PPP projects take much lesser time to complete and the Government does not have to bear cost over-runs. I appreciate the efforts of ASSOCHAM in holding this Summit on Public Private Partnership in Roads & Highways. I am sure the discussions and recommendations would be of tremendous help to all of us in the Ministry of Road Transport and Highways and the Government of India. I wish the event a grand success. D. S. Rawat Message Secretary General The Associated Chamber of Commerce and Industry of India (ASSOCHAM)

India’s growth-story in recent years is a most phenomenal development in the world economy. While stepping up public investment in infrastructure, the Govt. has been actively engaged in involving private sector to meet the growing demand. The creation of world class infrastructure would require large investments in addressing the deficit in quality and quantity. Therefore, it is necessary to explore the scope for plugging this deficit through Public Private Partnerships (PPPs) in all areas of infrastructure like roads, ports, energy, etc. ASSOCHAM attempts to address issues relating to Roads & Highways in a global prospective and some of the major issues in this discipline through our International SUMMIT on PPP in Roads & Highways. The latest estimates of the government project a $1 trillion investment in the infrastructure sectors for the Twelfth Plan (2012-13 to 2016-17). Though the PPP model has gained significant importance in the country, there is a need to refine and evolve it further to make it a successful proposition. The key issue that must be addressed is an approach to iron-out the conflicting interests of multiple stakeholders (governments, private players, financial institutions & users etc.). It gives me pleasure to share that ASSOCHAM and PwC have worked in unison to bring out this Background Paper on Roads & Highways and the critical role being played by different stakeholders to ensure a robust development in this vertical. The mission of this conference is to discuss the current infrastructure financing scenario and future investment requirements. The conference will also provide a platform for lenders, investors and developers to exchange views and create business opportunities in this vital sector. I am sure the Conference being held in the background of reaching our ultimate goal of vast network of Roads & Highways through Road & Highways Developers, Infrastructure Development Agencies, Institutional Investors, Financial Institutions, Banks & Private Equity (PE) Investors, Allied Industries (Cement, Iron & Steel etc) & other stakeholders will achieve its objectives. My best wishes to every one for making this initiative a success. Manish Agarwal Foreword Executive Director Head Infrastructure Practice PwC

Indian economy has been showing tremendous growth in the recent years and investment in infrastructure has played a vital role therein. In order to sustain the growth in future, there is a need for abundant capacity creation in the form of infrastructure development. Initiatives from the government have led to increasing private sector participation in India’s infrastructure development. The projected infrastructure development during the 12th Plan is expected to consume funds to the tune of about a trillion US dollars. Therefore, it is imperative to achieve inclusive development across all sectors of infrastructure like roads, ports, energy, urban infrastructure, railways, airports, etc through further increased participation from the Private sector. It has been proved beyond doubt that Public Private Partnership (PPP) has contributed significantly to accelerated infrastructure development. India has historically been a consumption driven economy. Therefore, development of roads sector warrants a greater priority. Funding for the Roads sector has been at about 15%-16% of the allocation for infrastructure. With increasing transport of goods, exports, highway connectivity to ports and airports; and connectivity to major cities, superior expressways are being seen as the future of road development. Roads sector has also seen many success stories in the episode of PPP development. However, PPP framework needs to evolve further to address the future challenges facing the sector and the country. The contract structures and risk-reward mechanisms need to be tilted to ensure win-win situation for all the stakeholders. I am pleased to share that efforts of PwC and ASSOCHAM have been dovetailed in bringing out this background paper on Highways. This conference has been organized to bring to light the issues currently being faced by the stakeholders who build the neural network of the nation (i.e. the roads). This conference is also a platform for stakeholders like developers, financial institutions like banks, NBFC’s, Private Equity and other allied industries critical to the development of roads sector to come together, improve and create business prospects in highways sector. Let’s unite in making this event a grand success Contents

Introduction 07

Five-year plans and 09 highway development

The national highway 10 development project: Genesis and evolution

PPPs in state highways 13

Different PPP models in 14 the highways sector

Financing for the 17 highways sector

Financing of PPP by the 18 private sector

Development of 20 Highways: Key challenges

Recent initiatives by the 23 NHAI

Outlook and opportunities 24

6 PwC Introduction 01

Figure 1: Road network in India India has an extensive road network The Ministry of Road Transport and of 3.3 million km. Roads carry about Highways (MORTH) is responsible for 65% of freight and 80% of passenger the development and maintenance of traffic in the country. This network national highways in the country. includes expressways, national National highways in India have a total highways, state highways, major length of 70,934 km and serve as the district roads, city roads, village and main road network of the country. rural roads etc. Even though expressways and national Among all the infrastructure sectors, highways constitute only about 2% of road transport contributes the most the length of all roads, they carry about to the country’s GDP. The transport 40% of the road traffic. The number sector in India has contributed 6% of of vehicles has been growing at an Source: NHAI the national income over a period of average of 10.16% per annum over the 10 years from 1999-2000 to 2008- last five years . This strains the road 2009. Of this, the share of road infrastructure. Moreover, only about Figure 2: Contributions from different sub-sectors of transportation sector to transport has increased from 63% in 24% of national highways have four or Indian GDP in 2000 and 2009 2000 to 73% in 2009. more lanes. This demands significant improvement in highways in India

Year 2000 Year 2009

The road ahead: Highways PPP in India 7 Figure 3: NH network in block of five years and estimated growth Growing national highway network The national highway network In 1947, India’s national highway witnessed slow growth between 1997 network was just around 23,000 km. This and 2002. This situation did not network grew gradually as there was improve and the network grew a mere no special focus given to it. It was in the 16% between 2002 and 2007, and just late 1990s that the government realised 6% between 2007 and 2012. the importance of improving the road Since national highways carry a major network in India. The network of national chunk of traffic, their share in the total highways has increased considerably road network in the country must in- over the last 15 years. In 1997, national crease. In line with the growing traffic, highways had a total length of 34,298 it has been suggested by the Working km which shot up to around 70,000 km Group on Central Roads sector that the recorded presently. The chart alongside national highway network must be at shows the additions to the national 85,ooo km by end-2017. This means a highway network from 1997 to 2012. 20% rise over their current length.

Source: Ministry of Road Transport and Highways, Planning Commission, NHAI, PwC analysis

8 PwC Five-year plans and highway 02 development

Table 1: Investment in roads and Highways in five-year plans The previous graph shows that the whopping US$ 58 billion investment maximum additions to the network in roads and highways sector under 10th Plan 11th Plan 12th Plan were made during the Ninth Five- public-private partnership (PPP). (2002-2007) (2007-2012) (2012-2017) Year Plan (1997-2002). Since the estimated The government of India, in its approach development of highways started in paper for the 12th Five-Year Plan, Roads and bridges investment 32.2 69.8 145.8 a big way in the late 1990s and has (US$ billion) has stated its priorities for the roads been progressing, we must analyse the Public 30.6 (95%) 46.1 (66%) 87.5 (60%) and highways sector. The Planning development of highways during the Commission has suggested the following Private 1.6 (5%) 23.7 (34%) 58.3 (40%) 10th (2002-07) and the 11th Five-Year three priority areas for development of Total plan investment in 193.7 456.9 910.9 Plans (2007-12). Analysing the way highways in the country. infrastructure (US$ billion) forward will include projections for the • Improving connectivity to areas in Roads and bridges investment 16.6% 15.3% 16% 12th Five-Year Plan. as % of total infra investment the northeastern region The private sector participation, which • Developing expressways with new Source: Planning Commission and PwC analysis was merely 5% during the 10th Five- (1USD = 45 INR) alignment Year Plan, is envisaged to increase to 34% during the current Five-Year Plan • Augmenting the capacity of single (2007-2012). Also, the investment in lane highways in the country which roads and highways is around 15% to are about 20,000 km long 16%. If similar allocation is assumed Of the three objectives, the first one for the roads and highways sector, the finds a place in the special accelerated proposed investment requirement will road development programme while be about US$ 146 billion during the the others are part of the national 12th Five-Year Plan. A 40% private highways development project. sector involvement will mean a

The road ahead: Highways PPP in India 9 The national highway development 03 project: Genesis and evolution

Table 2: Development plan of NH The development of national highways in Assam and the North-South in India has been entrusted with the Corridor from Srinagar in the north to NHDP-Phase Description Length ( km) Preferred Model of Development National Highways Authority of India Kanyakumari in the south with a spur (NHAI). The national highways project line to Cochin. NHDP was expanded I Golden Quadrilateral, North-South 7,522 EPC and East-West Corridors in 1993 helped expand and upgrade further to include Phases III to VII, of some sections of the national highways which 85% of the projects are being II Mostly North-South and East- 6,647 EPC West Corridors and other national in Andhra Pradesh, Bihar, Haryana, implemented through the PPP route. highways Rajasthan and West Bengal. The PPP in the highways sector III Four-laning of certain national 12,109 PPP Indian government had formulated highways on BOT basis a programme for the development PPP in highways started with the IV Upgrading single-lane highways to 20,000 PPP of national highways in India called NHDP. While the projects under NHDP two lanes with paved shoulders the national highways development Phase I and Phase II were predomi- V Upgrading four-lane highways 6,500 PPP project (NHDP) in multiple phases. nantly implemented under the engi- to six lanes including port Phases I and II were launched in neering procurement and construc- connectivity 1998. Phase I covered the Golden tion (EPC) mode, the PPP mode was VI Expressways 1,000 PPP Quadrilateral (GQ) connecting the also experimented and projects were VII Ring roads, bypasses and flyovers 700 PPP four major cities of Delhi, Mumbai, awarded under it. However, the PPP Chennai and Kolkata while Phase mode of procurement in a bigger way Source: NHAI II comprised the East-West corridor started with NHDP Phase III. from Porbandar in Gujarat to Silchar

10 PwC Figure 4: NHDP wise PPP projects award Figure 5: Year-wise PPP projects awarded by the NHAI

Source: NHAI, PwC Analysis; as on 30 November 2011

It can be observed from the chart here It can be observed from the chart that PPP in NHDP Phase III picked here that 209 PPP projects have been Source: NHAI, PwC analysis;as on 30 November 2011 up substantially and as many as 107 awarded up to November 2011. The projects were awarded under PPP in chart also clearly shows two stages in that phase. It has been recommended NH PPP, one before 2005 and another by the ministry and Planning from 2005. So, the real action in NH Commission that about 85% of the PPP started from 2005. From January projects need to be developed on PPP 2005 to November 2011, 191 projects mode in the later stages. have been awarded. However, only The chart here shows the growth of 18 projects were awarded from 1998 PPP in the Indian highways sector from to 2004. The number of PPP projects 1998 to 2011. awarded reached as low as six during

The road ahead: Highways PPP in India 11 Figure 6: Year-wise km length awarded under PPP 2008 which was primarily due to the global financial meltdown. Post 2008, the number of projects has picked up and 58 projects were awarded during 2010 alone. The length awarded was also in line with the projects awarded as presented alongside. In 2010, the length awarded under national highway PPP saw the maximum increase to about 5400 km from about 2500 km in 2009. However, from 1998 to 2004, only 830 km was Source: NHAI, PwC analysis; as on 30 November 2011 awarded under PPP. This rose to 17,401 km between 2005 and 2011 (upto November 11). This means a total Table 3: Status of NHDP up to August 2011 length of 18,231 km has been awarded NHDP-phase Length (km) % completed % under % to be under PPP upto November 11. implementation awarded National highways development: I 7522 99% 1% 0% Progress status II 6647 80% 14% 7% Presently in India, 24% of the national III 12109 21% 51% 28% highways are of four-lane or higher IV 20000 0% 4% 96% while 52% are of two-lane capacity. The V 6500 10% 31% 59% rest 24% are single-lane. The following VI 1000 0% 0% 100% table shows the progress of different VII 700 0% 6% 94% phases of NHDP as on August 2011. Source: NHAI, Planning Commission

12 PwC PPPs in state highways 04

Figure 7: State-wise PPP projects awarded Table 4: Investment committed in Rajasthan and Maharashtra have state highways PPP been frontrunners with each having more than 20 PPP projects under State Projects Cost (crore `) implementation or operations. The following table shows the distribution Andhra Pradesh 2 124 of state highway PPPs across states. Bihar 2 2,419 However, considering the investment Delhi 1 408 in PPP projects in state highways, about Gujarat 24 8,485 78,000 crore INR has been the overall Haryana 9 3,533 commitment to the sector. Uttar Pradesh Karnataka 3 416 leads the pack with an investment of Kerala 2 126 more than 40,000 crore INR. Though the state has only four projects, the single Jharkhand 1 55 project Yamuna expressway costs 30,000 Madhya Pradesh 44 6,877 crore INR. The table here shows the Maharashtra 34 8,126 break-up between investments in state highway PPPs. Source: PPP in India database Punjab 11 786 Rajasthan 29 2,088 Though some progress has been However, things have changed over PPP in state highways started much Tamil Nadu 6 1,786 made in state highways, it has a the past five to six years and as many later compared to the national Uttar Pradesh 4 42,838 long way to go because many states highways. This is mainly due to the as 15 Indian states have adopted the still do not have an appropriate Uttarakhand 1 26 absence of a body like NHAI and a PPP model in the highways sector. policy, institutional framework and proper PPP policy at the state level. In all, there have been 173 state PPP Total 173 78,093 willingness to invite the private sector States were also apprehensive of their projects in the highways sector. States Source: PPP in India database in highway development. institutional strength to manage PPP. such as Gujarat, Madhya Pradesh,

The road ahead: Highways PPP in India 13 Different PPP models in the highways 05 sector

Table 5: Various modes of PPP National highways The developer assumes the traffic risk in this case and agrees to pay a pre- Mode of Development Financing risk Traffic risk and Net cash The highways sector has evolved determined premium (escalating at 5% development risk accrual of toll outflow for the over the past decade, especially in per annum). fee collection government the national highways segment, and BOT-Toll- Concessionaire Concessionaire Concessionaire No is reaching the stage of maturity. So Out of the 209 projects awarded on Premium far, NHAI has awarded PPP projects national highways PPP basis as of BOT-Toll- Grant Concessionaire Concessionaire Concessionaire Yes under Build Operate and Transfer November 2011, 159 were awarded (BOT-toll) and BOT (annuity). NHAI on BOT (Toll) mode and the rest were BOT-Annuity Concessionaire Concessionaire Authority Mostly Yes. makes efforts to award projects awarded in the BOT (Annuity) mode. Net payment under BOT (toll). In case the project to be made is The following table shows the number the difference is not commercially viable, the BOT of projects that have been awarded on between the (annuity) mode is adopted. NHAI has PPP as on 30 November 2011. toll collection also decided to award some projects and the annuity It can be observed that three out payable. under the operation maintenance and The annuity transfer (OMT) mode. Recently, NHAI of four projects on a average are payments to invited requests for qualification for being awarded on BOT (Toll) mode. be made to 21 OMT contracts and as many as 80 Considering the investment in PPP the developer projects in national highways, 81% of mostly exceed applications were received. the investment is in BOT (Toll) projects the toll Since sections typically do not collections. while the remaining 19% is in BOT experience much traffic in case of OMT (Annuity) projects. Also, maximum OMT No Concessionaire Concessionaire No contracts, augmentation of capacity development (20 projects) under BOT (Annuity) except in in the form of lane additions may not was awarded under NHDP Phase II. case of paved be imminent. In such cases, just the shoulders The OMT contracts are still in the operations and maintenance of the nascent stages where there is no road facility are entrusted to the developer. construction involved.

14 PwC Table 6: Investment under various PPP Modes in NH State highways the KSHIP (Karnataka State Highway Improvement Project) programme No of Investment Length Completed Under Having seen the success of national being funded by the World Bank. The Projects (crore `) (km) (no of implementation highways PPPs, state governments government would pay 50% of the projects) (no of projects) too have used the models adopted construction cost during construction BOT (Toll) 159 1,26,394 14,981 44 115 by NHAI. The typical PPP contract and pay annuity during operations. BOT (Annuity) 50 28,934 3,251 17 33 structures include BOT (Toll) and The following table elucidates the BOT (Annuity). Recently, states like Total 209 1,55,328 18,232 61 148 project structure in case of hybrid Tamil Nadu and Karnataka have gone Source: NHAI, PwC Analysis annuity model. a step ahead and adopted innovative PPP models which have not been In the case of a PPP project, the private tried at the Central level. Tamil Nadu sector has a borrowing cost which is has adopted a hybrid annuity model higher than that of a state government. Project State Payment components in the for its Outer Ring Road project near Hence, a fraction of the cost on project hybrid annuity model Chennai. The hybrid PPP model for financing in case of hybrid annuity Chennai Outer Tamil Nadu Fixed Project support fund Annuity the Greenfield project comprises is less than the normal annuity Ring Road of `300 crore INR during every six both grant and annuity. The state framework. In the annuity model, the construction period months would provide the developer a project entire cost of project is financed at the KSHIP Karnataka Fixed lump sum payment at Annuity support fund during construction and cost of capital of the developer. The 50% of the construction cost every six during the construction period months semi annuity during the operations annuity receivable by the developer period. Similarly, Karnataka has has to be higher to meet the return Source: PwC Analysis adopted the hybrid annuity model expectation which is over and above for the upcoming four projects under the cost of capital.

The road ahead: Highways PPP in India 15 Figure 8: Cost of fund comparison under hybrid and normal annuity Whereas, in the case of hybrid annuity, the capital is financed at a rate which is the weighted average cost of capital of government and the private developer. The weighted average cost of capital under hybrid annuity project is always less than the cost of capital in case of normal annuity project. This results in marginal benefit for the government. Therefore, hybrid annuity is being considered by many other state governments. An innovative PPP model like this one has to be thought depending on the project dynamics and market condition to maximise benefits to the awarding authority and bringing in maximum efficiency of the private developer.

16 PwC Financing for the highways sector 06

The Central sector financing for The Planning Commission has highways had predominantly been suggested that 1,66,738 crore INR through the following five different would be required for NHDP during sources: the Five Year Plan from the private 1. Central road: Through cess on sale sector. The Working group on Central of petrol and diesel Roads sector has suggested that the ongoing NHDP phases I, II, III and V 2. Budgetary allocation have to be completed by the end of 3. Toll revenues on sections tolled by the plan period 2012-17. The period the government or NHAI envisages augmentation of 32,750 km of highways with four or more 4. Negative grants or premium from lanes. As envisaged, if 85% of the certain projects awarded on BOT projects have to be on PPP, it calls for (Toll) mode substantial requirement. 5. Multilateral funding

The road ahead: Highways PPP in India 17 Financing of PPP by the private 07 sector

Figure 9: Major problem of banks in infra financing With increasing private participation, of the bank. In another 37 cases, the the responsibility of financing amount of funding was in the range PPP projects rests with the private of 30% to 40%. Banks which have developer. The financing is mainly reached the sectoral caps with respect through equity and domestic debt. In to infrastructure lending are finding it addition, foreign funds in the form of difficult to lend further in this sector. private equity and external commercial This issue needs to be addressed with borrowings have not made sufficient new sources of funds with longer inroads into the Indian highways tenors and lower costs. sector. The absence of long-term Debt financing sources of funds have forced Indian commercial banks to stretch beyond To overcome issues faced by the private their limits in extending support to sector and commercial banks, efforts PPP in highways. Banks perennially are being made to create long-term suffer from issues such as high cost of sources of financing. Sources such deposits and asset liability mismatch as insurance, pension funds which (tenor of liabilities such as bank possess long-term capital do not lend deposits are short term in nature while directly to the infrastructure sector. infrastructure loans are long term in The corporate bond market in India nature). Banks fund long-term projects is also not liquid enough to provide with a view that existing deposits long-term debt. To bridge this gap, would be rolled over and the growth the India Infrastructure Debt Fund is in fund base would be exponential. proposed to be created with a capital The fund requirement for new projects outlay of 50,000 crore INR exclusively too is rising. This would lead to lack of for PPP projects. The objective of this availability of funds for the sector in fund will be to overcome the problems the future. Also, according to RBI, the faced by banks in infrastructure exposure of banks to seven of their top financing. These funds would be used 20 borrowers exceeded 40% net worth to refinance the loans by banks to

18 PwC the extent of 85% of the outstanding infrastructure projects. Under this Figure 10: Increase in importance of private equity project debt. This restructuring will in agreement, IIFCL and LIC will take turn release a good amount of funds to 20% each of a project cost, and IDFC commercial banks which could be lent the remaining 10%. This will help to new projects. Though SEBI and RBI banks take exposure in more projects have separately released guidelines to and also mitigate the risk of asset set up the fund under Mutual Fund and liability mismatch. Non-Banking Financing Corporation Equity financing route respectively, little action has been taken on this account. However, The equity requirement for projects India Infrastructure Finance Company has been sourced mainly from the Limited IIFCL has announced that it promoter’s funds. However, private will set up US$ 1 billion Infrastructure equity too has been an important Debt Fund by February 2012. As per contributor to the provision of equity IIFCL, Asian Development Bank and requirement for infrastructure projects. HSBC will contribute 25% each to the There have also been cases where non- fund and the remaining will come from banking finance companies (NBFCs) IIFCL (26%), IDBI Bank (14%) and LIC have made equity contribution to (10%). highway projects. Also, NBFCs and vehicle (SPV). These are subject private equities are significant in Another initiative to deal with asset to regulations by the RBI as they providing necessary funds for the liability mismatch was taken by way have been classified as systemically highways sector. The government too of Take Out Financing Scheme. The important core investment companies. has provided tax incentives to NBFCs much talked about scheme which Hence, leveraging at the level of the for raising infrastructure bonds. refinances the existing set of lenders holding company will become difficult. in an infrastructure project has been In addition, there are many promoters Thus, private equity players will play doing the rounds since 2010. However, who have the capabilities to build an important role in financing projects in September 2011, IIFCL, LIC and roads but face shortage of funds. These in the highways sector. IDFC entered into an agreement to would typically be holding companies provide up to 30,000 crore INR to of infrastructure special purpose

The road ahead: Highways PPP in India 19 Development of Highways: Key challenges 08

Delays in project awards the range of 20,000 km. Hence, the Figure 11: NHAI target and achievement achievement of project awarded needs For the past two years, there has been to be around 8,000 km yearly if we shortfall in PPP project awards by are to build 20 km of road per day. It NHAI. In 2010-11, a mere 56% of the is understood that NHAI is planning target kilometres that was planned for to have cumulative work in progress award was actually awarded. The next in about 23,080 km as on 1 April 2012 year, the situation was similar with just to achieve higher road construction 51% of the target achieved. per day. However, that appears to be highly challenging considering the Table 7: Status of target and achievement progress so far. The same is the case Target awards 2010-11 2011-12 with state highways projects and Target kms 9,000 7,995 many state governments are finding Actual kms 5,059 4,083# it difficult to create the shelf of PPP awarded projects. Achievement 56% 51% Delays in project execution Source: Planning Commission, NHAI; #upto 30 November 2011 In the past few years, there has been consistent decline in execution of Source: MORTH national highways. It is a serious issue as it will affect the target of the The target construction of national construction of 20 km per day. highways is set at 20 km per day. This translates to an annual construction of In 2009-10, the target length of road 7,300 km. Assuming that the general (NHDP) to be constructed was 3165 development period for a project is km. This has to be increased by about 30 months including the period for 200% to 7300 km to achieve 20 km of financial close, the total length of road construction per day. However, projects under construction must be in the construction during the year was only 2693 km showing achievement

20 PwC of 85%. The speed of construction fell This delay can be attributed to land compensation. Once the bill is passed, Litigations in Highway projects arise further in the year 2010-11 to 1780 acquisition, delays in procurement the process of land acquisition might due to various reasons, these include km ( 71% achievement) and to 822 km and construction by the developers or become faster and will not impact the Land related issues, approval related (33% achievement) in year 2011-12 contractors, etc. However, historically, project construction. issues, delays in submission and (upto October 2011). In financial year most PPP projects in India have Delays due to lapses by the private acceptance of drawings/documents, 2011-12 (up to October 2011), only achieved financial closure within the sector can be addressed by improving deviations from agreed terms, 4.5 km road was constructed per day given deadlines. Hence, these delays project management practices. These difference in interpretation of certain on an average. This is far below the could be due to handing over of issues need to be addressed if we were clauses. Challenges arose in speedy set target. Also, a sample of 25 PPP entire land in time, utilities shifting, to achieve the desired target of 20 km delivery of verdicts in these cases. projects which were awarded earlier inefficient project planning and road construction per day. Once awarded, the funds locked in and were likely to be completed by management by the authority and the would be released and these could November 2011 were studied to assess developer communities. Similarly, Issues related to Dispute be used in new projects. Hence, a the compliance with project schedule. most state government projects are Resolution committee under the chairmanship of It was observed that the minimum running behind their schedule too. Mr. B.K. Chaturvedi was constituted to As many as 1646 cases related to NHAI delay is four months and the maximum give recommendations on improving The delays in land acquisition can be projects are under litigation at different delay is 37 months. The average delay the dispute resolution procedure. overcome if the cases related to land levels. As of March 31st, 2011; funds per project was around 22 months. The committee came up with its acquisition are put on fast track. The amounting to the tune of 11206 crore recommendations to classify the Indian government has taken efforts INR is under dispute across various cases based on the amounts involved Table 8: Delay in project execution to table the new land acquisition bill contracts involving NHAI. Delays in project execution which provides for high compensation in these disputes. Based on these recommendations; No of PPP projects studied 25 in case of land being acquired for Table No 9- Disputed Cases in NHAI Minimum delay 4 months public purposes. The bill provides No. of Cases Amounts a. Category A disputes – Where for compensation for parting of land ( Crore `) amount involved is less than Rs. Maximum delay 37 months to the owner and also for loss of Arbitration 1105 10227 10 crore or 5% of contract value Average delay 22 months livelihood. This bill will solve the issues Tribunal (whichever is lower) to be referred Source: NHAI of land acquisition, rehabilitation and Courts 541 879 to a committee consisting of resettlement and provide adequate retired High Court judge, former Source: MORTH

The road ahead: Highways PPP in India 21 CAG, vigilance commissioner and related to change in law. However, Figure 12: Increase in MAT rate technical expert. the change in law does not protect the b. Category B disputes – Where project company from increase in rates amount involved is between Rs. of direct taxes. On the other hand, 10 crore and Rs. 100 crore. In such government provides tax holidays cases, the recommendations of the to infrastructure projects. However, arbitration tribunal may be accepted project companies are liable to pay minimum alternate tax during the The committee has recommended years where the book profits are higher review of the verdicts by the dispute than the taxable profits. Credit can be resolution board by a separate availed on the minimum alternate tax technical expert to increase the that was paid in the subsequent years credibility in the process of dispute where there is a need to pay corporate - - - resolution. We believe that, the tax. The minimum alternate tax has recommendations having been been consistently rising over the year and State level) are geared to have state highways projects. However, accepted by the ministerial panel as given in the figure alongside: would aid to putting the resolution of robust contract management plan and finding historical information on disputes on fast track. The minimum alternate tax which effective institutional framework or state highways projects with respect was at 7.5% in 2005-06 was increased mechanism in place so that following to capital cost and operation and Issues impacting the viability of steadily and is currently at 18.5%. This can be achieved: maintenance cost is a big challenge highways PPP impacts the project viability greatly. 3. Sound contract administration because state authorities do not Infrastructure projects in general Contract management and value maintain such information in a 4. Performance monitoring way which is required. Therefore, have a long gestation period before for money analysis profits are generated. The critical 5. Effective service delivery conducting VfM for state highways factor determining the risk of viability As India moves further on the 6. Cordial relationship management PPP projects will be a challenge. State scale of PPP projects in highways, highways authorities need to create of a project is the capital cost. The In addition, Draft National PPP management of contract and effective a database of historical projects with agreement provides for adequate Policy 2011 requires value for money monitoring will be equally important details like time and cost which would compensation due to changes in (VfM) for all PPP projects in future. to achieve the efficiency of private help in VfM exercise, if required. regulatory environment impacting To analyse VfM, there is a need for the costs of the project by provisions sector. Therefore, it is important that the awarding authorities (Central historical information on national and

22 PwC Recent initiatives by the NHAI 09

Initiatives such as annual pre- bids. This has reduced a lot of paper qualification of applicants and work without compromising the e-tendering have been welcomed by transparency of the bidding process. the industry. Annual pre-qualification With players becoming more and more is a process adopted by NHAI recently. aggressive in bidding for road projects, Earlier, developers were asked to developers feel that the annual submit applications for qualification qualification process has helped them for each and every project. That not assess competition better. Developers only made the process repetitive also feel that they are able to assess adding to redundancy but also resulted the appetite of each other developer in in a lot of time being consumed in bidding for highway projects. this task. NHAI, with the advent In addition, the e-tendering mode of of request for annual qualification submission of bids too has reduced (RFAQ) process, has released a list of paperwork to a great extent.The option developers who have been adjudged for making payment for purchase as qualified for the year with the cost of applications has also been made of projects for which they can submit available online to the developer.

The road ahead: Highways PPP in India 23 Outlook and opportunities 10

In India, the number of developers Government must ensure faster project milestones stipulated in the cash and receipts at toll plazas. To entering the road development space procurement of all statutory concession agreement. The authority overcome these issues, electronic toll has been on the rise. While it demands clearances. 100% of the land and right appoints an independent engineer who collection is important. Although a more vigilance on the part of the of way required for a project should monitors the progress of projects and committee set up in this respect has government to ensure that only the be handed over to the developer periodically reports to the authority. given its recommendations on, its early capable players are entrusted with the before the start of construction. It The concessionaire is hereby motivated implementation will be a challenge as responsibility of road development, is also required at the state level to to complete the project within all national highways in the country it has also increased competition and have effective highways PPP policy the stipulated time and without need to be integrated. augmented the capacity of the country in place before inviting the private compromising the safety standards While the highways sector in India as a whole in increasing the speed sector to develop highway projects. and quality. Moreover, the substantial is likely to face some challenges of development (more players in the Many state governments still do not transfer of risk to the developer can in future, it offers significant industry ensure parallel development have highways PPP, toll policy and help the government focus on a large opportunities of investment. The of highways at multiple locations a proper institutional arrangement number of projects across a larger investment in the road sector has been within the country). The main hurdle to effectively manage the contract. geography. Hence, the authority rising and is estimated to increase to in the development of highways Therefore, authorities at state level needs to have sufficient manpower US$ 69.8 billion in the 11th Five Year at a faster pace is the delay in land have to pro-actively initiate the steps in and organisation to manage large size Plan from US$ 32.2 billion in the 10th acquisition and statutory clearances. this direction to be better prepared for projects across geographies. They must Five Year Plan. The estimate for the In the absence of stronger land laws, highways PPP projects. work together with the concessionaire, 12th Five Year Plan suggests that the land acquisition becomes a contentious With increasing private participation, state government and other stake investment requirement by private issue in a country like India with critical risks are transferred to the holders to ensure project success. sector could be well above US$ 145 a large population. Effective legal private sector. Government assumes It has been felt that congestion levels billion. This shows a huge potential framework and proper execution with the role of a monitoring authority have been increasing at the toll plazas. for private sector participation in respect to land acquisition is needed where projects have pre-determined A lot of time is spent in exchange of highways building in India. for a faster development of roads.

24 PwC Notes

The road ahead: Highways PPP in India 25 About Assocham The knowledge architect of corporate india

Evolution of Value Creator Mission Insight into ‘New Business THE ASSOCIATED ASSOCHAM initiated its endeavour As a representative organ of Models’ CHAMBERS OF COMMERCE of value creation for Indian industry Corporate India, ASSOCHAM ASSOCHAM has been a significant AND INDUSTRY OF INDIA in 1920. Having in its fold more articulates the genuine, legitimate contributory factor in the emergence (ASSOCHAM) than 400 Chambers and Trade needs and interests of its members. of new-age Indian Corporates, Associations, and serving more than Its mission is to impact the policy characterized by a new mindset ASSOCHAM Corporate Office, 1, 4,00,000 members from all over and legislative environment so as to and global ambition for dominating Community Centre Zamrudpur, India. It has witnessed upswings as foster balanced economic, industrial the international business. The Kailash Colony, well as upheavals of Indian Economy, and social development. We believe Chamber has addressed itself to the New Delhi - 110 048 and contributed significantly by education, IT, BT, Health, Corporate key areas like India as Investment Phone: 46550555 (Hunting Line) playing a catalytic role in shaping up Social responsibility and environment Destination, Achieving International the Trade, Commerce and Industrial to be the critical success factors. Competitiveness, Promoting Fax: 46536481/46536482 environment of the country. International Trade, Corporate 46536497/46536498 Today, ASSOCHAM has emerged as the Members – Our Strength Strategies for Enhancing Stakeholders Email: [email protected] ASSOCHAM represents the interests Value, Government Policies in fountainhead of Knowledge for Indian Website: www.assocham.org industry, which is all set to redefine the of more than 4,00,000 direct sustaining India’s Development, and indirect members across the Infrastructure Development for dynamics of growth and development Project conceived & executed by: in the technology driven cyber age of country. Through its heterogeneous enhancing India’s Competitiveness, ‘Knowledge Based Economy’. membership, ASSOCHAM combines Building Indian MNCs, Role of R. K. Bhasin the entrepreneurial spirit and Financial Sector the Catalyst for India’s Joint Director - ASSOCHAM, ASSOCHAM is seen as a forceful, business acumen of owners with Transformation. Email: [email protected] proactive, forward looking institution management skills and expertise of Cellphone: +91-9999917406 equipping itself to meet the aspirations professionals to set itself apart as a ASSOCHAM derives its strengths from of corporate India in the new world Chamber with a difference. the following Promoter Chambers: Jitendra Kumar Sharma of business. ASSOCHAM is working Bombay Chamber of Commerce & Email: [email protected] towards creating a conducive Currently, ASSOCHAM has more than Industry, Mumbai; Cochin Chambers Satnam Kaur environment of India business to 100 National Councils covering the of Commerce & Industry, Cochin: Email: [email protected] compete globally. entire gamut of economic activities Indian Merchant’s Chamber, Mumbai; in India. It has been especially The Madras Chamber of Commerce Abhishek Saxena ASSOCHAM derives its strength acknowledged as a significant voice of and Industry, Chennai; PHD Chamber Email: [email protected] from its Promoter Chambers and Indian industry in the field of Corporate of Commerce and Industry, New Delhi other Industry/Regional Chambers/ Social Responsibility, Environment and has over 4 Lakh members. Vivek Agrawal Associations spread all over the country. & Safety, Corporate Governance, Email: [email protected] Information Technology, Biotechnology, Together, we can make a significant Vision Telecom, Banking & Finance, Company difference to the burden that our Empower Indian enterprise by Law, Corporate Finance, Economic nation carries and bring in a bright, inculcating knowledge that will be the and International Affairs, Tourism, new tomorrow for our nation. catalyst of growth in the barrierless Civil Aviation, Infrastructure, Energy technology driven global market and & Power, Education, Legal Reforms, help them upscale, align and emerge Real Estate and Rural Development to as formidable player in respective mention a few. business segments.

26 PwC About PwC

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Manish Agarwal Executive Director and Head Infrastructure Practice Email : [email protected] Phone: +91 9967574800

Vikash Sharda Senior Manager Infrastructure Practice Email: [email protected] Phone: +91 87 544 31537

The road ahead: Highways PPP in India 27 pwc.com/india This publication does not constitute professional advice. The information in this publication has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this publication represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take.

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