CASE STUDY: TOLL ROAD PROJECT Background Road sector has been identified as one of the key infrastructure

bottlenecks impeding economic growth in India. In order to address this issue, Government of India (GoI) has initiated the National ighways !evelopment "ro#ect (N !") for development of national highways. GoI has given the mandate of implementing the N !" (total length $%&&& km) in two phases to National ighways 'uthority of India (N 'I). (hen the N 'I launched its )*+ initiative, it picked up a ,&-.m stretch as a pilot pro#ect in a north western state better known for its princely cities. +he reasons were simple / it was a clean stretch on plain terrain on a busy National ighway which connects !elhi and 0umbai / the busiest corridor in the country. *n its way to 0umbai the N crosses the industrial centres in Gu#arat and provides the ma#or road link to ports on the western coast of India. +he .10 toll road being developed by the consortium of ')2 group, !34 and G I is India5s first ma#or tollway pro#ect on the National ighway network by the private sector. +he pro#ect involves widening and strengthening of the e6isting 7-lane stretch (of 8& .m plus length) on the N . +he scope of the "ro#ect includes design, engineering, financing, construction, operation and maintenance of the pro#ect facility under a 7&-year concession granted by N 'I. +he bidding process re9uired the bidding parties to bid the minimum grant. +he winning consortium 9uoted a grant of Rs 7$$& million. Sponsors ')2 Group5s areas of operation include power generation, information technology, bio-informatics, construction, wood based processes, chemicals and polymers and hospitality industry. +he Group has successfully e6ecuted a number of irrigation and hydro power pro#ects, including (orld )ank aided pro#ects, notable amongst them being the Nagar#una :agar dam / one of the largest masonry dams in the world.. !34 is well diversified conglomerate engaged primarily in five business areas, namely, engineering ; construction, cement, electricals ; electronics, earth moving ; construction e9uipment and information technology. It is one of India5s largest engineering ; construction and cement company. !34 has developed several infrastructure pro#ects including roads ; bridges, power plants, I+ parks etc. G I is a fast growing construction company in India specialising in road construction including highway pro#ects. !uring the last < years, it has e6ecuted several highway construction pro#ects including =-laning and strengthening of national highways, state highways and other road stretches spread across si6 states.

Project Details +he scope of the "ro#ect during the construction period includes the following> Rehabilitation and upgradation of the e6isting 7-lane N section to partial access controlled ?-lane divided carriageway with a median width of <.& mts@ 2onstruction of service roads along with other allied structures at specified locations@ 2onstruction of %(three) minor bridges@ 2onstruction of culverts and other cross drainage structures@ 2onstruction of properly designed #unctions for safe and uninterrupted movement of traffic at identified locations@ 2onstruction of two trumpet-type interchanges together with associated structures, transfer ramps and speed change lanes@ (idening of % (three) ma#or bridges to ?-lanes@ "roviding markings, signage and road side furniture@ Road user amenities@ and 2onstruction of "ro#ect Implementation Anit ("IA) comple6.

Contractual Structure
Sponsor ( )* S+&re+o,%ers- A ree!ent Sponsor 1 ABC EPC Contr&ctor

EPC Contr&ct

E"#it$ Lo&n ' Sec#rit$ Doc#!ents Project SPV Senior Len%ers

Ins#r&nce Co!p&n$

Ins#r&nce Po,ic$

S#./De.t A ree!ent

Concession A ree!ent

S#.stit#tion A ree!ent

1r&nt S#./De.t In0estors NHAI

Concession Terms +he pro#ect :"B has been granted a 7& year concession to develop, operate and maintain the pro#ect stretch in return for the right to toll. +he :"B was given 8 months for financial closure and is re9uired to complete construction within %& months of financial close. +he toll rates applicable are Rs &.<% per "2A per .m in the first year of operations and are inde6ed with inflation ((hole sale "rice Inde6, ("I). +he concession provides protection against competing facilities till traffic reaches $=&,&&& "2As and for a minimum period of 8 years from completion. It also provides a $%%C higher toll rate for competing facilities. +he concession re9uires the consortium to hold <$C e9uity till $ year after 2*! and 7?C during the balance remaining concession period. +he entire land free of encumbrances is being provided by N 'I free of cost. +he agreement provides for disbursement of <&C of the grant after <&C e9uity is brought in by sponsors. )alance grant would be disbursed pro-rata with debt. N 'I has agreed to provide to the :"B shortfall support by way of a revenue shortfall loan if the toll revenue in any year during the concession period falls below the :ubsistence Revenue 1evel (i.e. *;0 e6penses D !ebt :ervice). +he interest and principal on this loan will be subordinated to the senior debt. 1enders have step-in rights for concessionaire events of default. 4or concessionaire events of default leading to termination after completion N 'I has covered the lenders to the e6tent of ,&C of the debt due. 4or N 'I5s events of default during construction lenders are fully covered while sponsors get their e9uity with return E :)I"1RD%C. !uring operations in the event of termination due to N 'I5s event of default the lenders are fully protected while the e9uity has a termination payment linked to N"B of future cashflows. Project Cost +he cost of the pro#ect, including the 3"2 costs, preliminary and preoperative e6penses has been estimated at Rs ?$=< million. +o establish the reasonableness of capital cost of the pro#ect, I!42 had appointed an engineering consultancy firm to vet the sponsors5 estimates. +he lenders5 engineer would have a continuing role during the implementation period to monitor the progress of the pro#ect on behalf of the lenders. Financing

Infrastructure !evelopment 4inance 2ompany (I!42) acted as the financial advisor and the lead arranger for the pro#ect. +he pro#ect cost of Rs ?$=< million was financed by way of Rs $&$$.F& million of e9uity, Rs 7$$& million of grant by N 'I, Rs 787%.%& million of senior debt and Rs 7&& million of subordinated debt. +he debt package of Rs %&7%.%& million for the pro#ect has been structured in the form of Rs 787%.%& million of senior debt and Rs 7&& million of subordinated debt, with a debt-e9uity ratio of F&>%&. I!42 underwrote the entire debt component which was subse9uently syndicated to the e6tent of Rs $87%.%& million of senior debt and Rs $&& million of subordinated debt. In *ctober, 7&&7, I!42 approached the bank market for the syndication e6ercise. )y the date of close of the syndicate in 4ebruary, 7&&%, I!42 had received final sanctions well in e6cess of the re9uirements. +he documentation process was completed and the "ro#ect achieved financial close in 0arch, 7&&%, marking an important landmark in the history of private toll road financing in the country. +he senior debt facility has a tenor of $% years from 2*!. +he facility has been priced competitively compared to other similar transactions in the market. +he subordinated debt facility has a tenor of $% years from 2*!, with the pricing again being fair with regard to its risk profile. +he subordinated debt is #unior in priority of repayment but shares security pari-passu with the senior debt. It also carries a conversion option e6ercisable till , months after the 2*!. )oth the senior debt and the subordinated debt have structured repayment profiles, matching the e6pected cashflows generated during the operations period.

2in&ncin
Instr#!ent E"#it$ C&pit&, 1r&nt 2ro! NHAI Senior De.t S#.or%in&te% De.t Tot&,

P,&n
A!o#nt )Rs !* 1311453 (113433 (6(7473 (33433 819:433

Key Risks Traffic Ancertainty pertaining to traffic pro#ections is the key risk element in case of toll road pro#ects. 3arly e6perience in India has been mi6ed at best. :ome of the important pro#ects have suffered as pro#ected traffic failed to materialise. 'lthough N 'I had got a detailed feasibility done by reputed consultants I!42 appointed an internationally reputed consultancy firm to conduct detailed traffic assessment for the pro#ect. 2loser to the date of final approval by syndicate, the traffic numbers were vetted by another traffic consultant. +he two estimates were in close pro6imity of each other. 'nalysis of the highway network revealed that there would be no significant competition to the pro#ect road. +he lenders financial model was worked out with fairly conservative growth estimates. +he probabilistic analysis carried out by I!42 indicated that the debt was ade9uately covered and the probability of default in stress scenarios was below the acceptable limit.

Pro.&.i,istic An&,$sis o; Project Econo!ics

+raditional financial models rely on sensitivity analysis where one (or more) variables are assigned specific values and the robustness of the pro#ect economics is #udged by the behaviour of selected performance indicators (:"Is) under various scenarios. :ince real life situations rarely demonstrate isolated movement in pro#ect variables, the utility of such analysis is limited. I!42 uses a probabilistic analysis approach for pro#ect finance modelling. 's part of this the analyst identifies the variables and 9uantifies their impact on :"Is. +he analyst then picks up certain key variables which are responsible for ma6imum impact on :"Is. :ubse9uently, the impact of these variables on :"Is is analysed in detail under varying probabilistic

Tolls +oll rates are based on the N 'I rates, which are linked to the ("I. :everal toll based pro#ects have become operational in recent years and the culture of toll payment is getting established. 'nalysis by traffic consultants has estimated that the proposed tolls are at a reasonable discount to savings in vehicle operating cost and value of time. Given the nature of terrain an open tolling system is proposed. +he concession re9uires the :"B to provide service at lower tolls to local traffic.

Time Overrun 's per the concession agreement, for any delay in completion of the pro#ect within the stipulated time frame of %& months, the 2oncessionaire would have to pay N 'I weekly damages, an amount calculated at the rate of &.&$C of the +otal "ro#ect 2ost per week. +he 2ompany has entered into a fi6ed time-fi6ed price contract with the 3"2 2ontractor. +he 3"2 2ontractor bears the responsibility of delivering the pro#ect within a period of 7= months. 36tension of time has been provided to the contractor only in events which have a back-to-back protection in the concession agreement. +he 3"2 2ontract has suitable levels of 1!s to cover for any delay in completion of the pro#ect. Cost Escalation +he 2ompany has entered into a fi6ed price contract with the 3"2 2ontractor. +he cost overrun risk has been substantially mitigated since 8?C of the pro#ect cost would be on a firm basis on account of a fi6ed price 3"2 contract. +he 3"2 2ontractor is re9uired to provide suitable performance security in favour of the 2ompany. +he 3"2 2ontractor is allowed a change in the contract price only on account of change of scope, change in law and 40 events, which have a back-to-back protection in the concession agreement. +o take care of any e6igency, suitable contingency has been provided for in the pro#ect cost. 'dditionally, suitable undertakings have been procured from the sponsors to mitigate any residual risk on account of escalation in pro#ect cost. Force majeure +he concession agreement provides full protection to the lenders in all events of force ma#eure e6cept in cases of non-political events, where lenders are protected to the e6tent of ,&C of the debt due. ' comprehensive insurance package has been put in place to mitigate various insurable risks. 4or this purpose, the lending consortium have utilised the services of a specialised insurance consultant. Concluding Remarks +he pro#ect is one of the largest privatised toll road financing deals to have been concluded in India. +he key to the whole transaction was the strong sponsor profile, sound contractual structure, efficient financial structuring and a conservative financial model. +he pro#ect has achieved timely financial close in an environment which has been dominated by annuity based road financings and where performance of early toll roads has been significantly lower than pro#ections. It is hoped that the successful financial close of this pro#ect shall pave the way for more )*+ toll road pro#ects, especially in light of Government of India5s recent most initiative pertaining to $&,&&& km of Non-N !" pro#ects. *ne thing is certain - there is substantial appetite in the Indian financing market for strong and well structured road pro#ects. GGGG