Term Paper

Report of findings where students

undergone course on Infrastructure
Infrastructure
Finance
Finance & PPP and demonstrated
theory in and
practice
by analyzing a
PPP
project

Externalities in
Infrastructure
projects: A Choice or
a Necessity

Submitted to

Prof. V. Ranganathan
Submitted by

Amresh Kumar
Pankaj Kumar
PGP14036
Manimaran S
PGP14078

PGP14007

Table of Contents
Table of Contents............................................................................................................. 1
An Introduction............................................................................................................... 2
Project details................................................................................................................. 3
Major Events that affected project........................................................................................ 3
Project Stakeholders......................................................................................................... 4
Concession Agreement between Jaypee & YEA (Govt. body)......................................................5
Highlights of the project.................................................................................................... 6
Risk analysis.................................................................................................................. 6
Financial Analysis of the Project.......................................................................................... 7
Economic Analysis........................................................................................................... 9
Conclusion and Recommendations..................................................................................... 10
References................................................................................................................... 11

Externalities in Infrastructure projects: A Choice or a Necessity

1 | Page

An Introduction
In many of our daily situations we feel that something, someone or the other has affected our
happening of things though we didnt intend them to affect. In economic terms these are called as
Externalities. In economics, an externality is the cost or benefit that affects a party who did not
choose to incur that cost or benefit [1]. Two British economists are credited on their name for
carrying formal work on this concept. Though it has gained importance in automobile and other
agents/actors which jeopardize ecological system it also got notified in finance literature mostly
Project finance projects.
In order to validate and verify the basic premise of this work, a study on the
roadways project undertook by Uttar Pradesh (UP) state government has been considered
called Yamuna Expressway (referred to as YE herein after). YE is a 6-lane (can be extendable
to 8-lane), 165 km long, controlled-access expressway connecting Greater Noida and Agra in the
Indian state of UP. It is the longest 6-lane expressway stretch of the nation conceived by the
Government of UP in 2001, in a move to open up tourism and avenues for Industrial and Urban
development of the region. The main objective was to improve the connectivity of the National
Capital Region (NCR), to improve tourist attraction of one of Indias most precious monument,
the Taj Mahal at Agra.
Following are the objectives of the project YE

Safer and shorter-time travel from National Capital Region to Agra

Travel by means of existing roadways was a 4-6 hour journey and there were multiple
fatalities reported on any single day. So, this expressway was intended to provide a
reduced time for travel with world-class quality and hence reduced number of fatalities.

To open the area on the eastern bank of the river for industrial and urban development
The districts on the eastern bank of the river through which expressway passes were
mostly agrarian & rural lands and they were in the need of industrial and urban
development. So, as this project enabled both expressway and associated Industrial,
Urban development.

To develop Tourism in the state ( especially the Taj Mahal)

One of the primary reason for the expressway was to reduce the travel time because one
of the famous foreign tourist destination the Taj Mahal which is situated in Agra. This
road is expected to boost the visitors count because it reduces time required to travel from
an International airport (Delhi) to destination (Agra).

To develop the adjoining areas and provide them with access to the townships and
commercial spaces

2 | Page

Villages of the districts through which expressway passes through are meant to benefit
from the townships and commercial spaces that come along with this project.

Project details
Below mentioned table highlight salient features of the Yamuna Expressway

Parameter

Value

Length

165.5 Km

Right of Way

100 mts.

Number of Lanes

6 lanes ( extendable to 8)

Type of Pavement

Rigid (Concrete)

Interchange

Main Toll Plaza

Vehicular Underpasses

70

Apart from the above mentioned details the project also include SOS booths for emergency
services, CCTV cameras for safety and accident assistance, mobile radars to monitor compliance
with speed limits as the facilities to be made available. Following picture shows the major places
through which the expressway passes through

Figure 1: Expressway - Major Places

3 | Page

Major Events that affected project

This project took almost 15 years right from ideation in the year of 1997 to become reality in
2012. There were series of events which impacted the project to get executed and understandings
of them are necessary to this study. Major events are discussed below in chronological order
Year 1997 was the time when idea of this fast way of communication was popped with
the then Chief minister of the state UP Ms. Mayawati, who conceptualized it in the year of 2000.
Invitation for biddings of the project were opened it following year which were to be scrapped to
open new window for re-bidding which observed Six bidders in the play. Concession agreement,
an agreement is a grant of rights, land or property by a government or an entity of that sort. This
agreement of the YE project was signed in the year 2003 between YEA (Yamuna Expressway
Industrial Development Authority) and JAL (Jaypee Associates Limited). This was also the year
which observed stepping down of Ms. Mayawati as CM against corruption allegations and as a
result of assembly elections, which made the project to come halt in the view of different
government in power at state.
Government at state, which constantly criticized the project right from its inception
appointed a committee namely Narayan committee to verify the integrities of the project. It came
with a report which was in favor of the project and thrashing the allegations that they were not
true in its nature. 2007 was the year when assembly elections were to happen and result of it was
BSP (Bahujana Samaj Party) returning to take power at state government. Ms. Mayawati back to
assume power as CM of the state, which was an optimistic sight for the YE project and its
construction began. Three years following this year experienced various land acquit ion issues
that Govt. has not paid satisfied value for land being acquired in districts Mathura, Tappal etc. In
between these in 2009 there was a major modification proposed in the contract. It was to
introduce an urgency clause which meant for the extension of the construction period due to
unexpected delays in the land acquisition.
Unfortunately the loss of assembly elections by BSP and SP (Samajwadi Party) returning
to power made the inauguration of the expressway not happen in the hands of the brain behind it
Ms. Mayawati. New government scrapped the Taj International Airport project and expressway
was left unused because of elections for a period of 5 months, which later inaugurated by CM
Mr. Akhilesh Yadav on 9th of August 2012. Rich development in Industrial, Urban and
Residential sectors were observed during and after the construction of expressway.

Project Stakeholders
Concessionaire- Jaypee industries Ltd. formed a SPV Jaypee Infratech Ltd. for execution of this
project whereas Jaypee Associates Ltd. was responsible for Operations Maintenance, Work
Contractor and sponsoring the Project.
Project Lenders ICIC Bank, Axis Bank and SBICAP
The total cost of project was estimated to be 9739.2 crore which was funded through Debt
Equity ratio 1.6. The total debt requirement for the project was estimated to be 6000 crore out of
4 | Page

which 3000 crore was raised by ICIC bank and for remaining debt the company has approached
Axis Bank and SBICAP for senior debt.
Concessionary Yamuna Express Industrial Development Authority was nodal agency setup by
Govt. of UP and this agency was given responsibility to plan and construct Yamuna express way
connecting Noida and Agra and they were also given rights to develop land along the express
way in order to make this project financial viable.

E
Y
y
C
(
d
L
t
c
e
j
o
r
P
s
k
n
a
B
f
m
u
i
)
O
&
,
M
A
J
p
S
W

Concessiona
ire
(Jaypee
Infratech
Limited

Figure 2: Various parties involved

Concessionary Yamuna Express Industrial Development Authority was nodal agency setup by
Govt. of UP and this agency was given responsibility to plan and construct Yamuna express way
connecting Noida and Agra and they were also given rights to develop land along the express
way in order to make this project financial viable .

Concession Agreement between Jaypee & YEA (Govt. body)

o Concessionaire were given rights for collecting toll revenue for the period of 36 years
o Land development rights of 25 million sq. meter approximately was also given alongside the
Express Way
o Land at 5 or more locations with an area of 5 million sq. meters alongside the Express way
for Commercial, amusement, industrial, institutional and residential development 90 yr.
lease with acquisition cost
o Land for development as well as Expressway transferred to Concessionaire on acquisition
cost plus lease rent of Rs 100/- per hectare per year
5 | Page

o As per the BOT agreement the Concessionaire was supposed to borne the cost of
construction, funding and operating the Expressway

Highlights of the project

o It was Indias longest Six Lane project which has scope to expand up to 8 Lanes with
access controlled expressway made up of concrete pavement connecting NCR to Agra
o Agra is amongst the top destinations for tourists in India and it was considered was major
source of traffic revenue resulting from increase in tourist visitors
o The express way is supposed to reduce travel time between New Delhi and Agra from
present 4 hrs. to 2 hrs.
o In addition of Express way development this project was supposed to bring about Ribbon
Development along the expressway by Yamuna Expressway Authority which included
real estate development like Special Development Zones for IT, Industries,
Biotechnology, Service Sectors & Commercial
o Real Estate development also included 5 integrated townships with total real estate
development of 530 mn. sq. ft. was planned out of which 311 mn. sq. ft. was proposed
near NCR region which was expected to result in high revenue .
o The Jaypee Infratech Ltd. was one of the unique Infrastructure Company enjoying 80
I(A) tax benefit with two revenue streams i.e. toll income and real estate revenues
o For the period of 2009-13 NCR region was expected to have 2nd highest real estate
demand with NCR itself having demand for 1.02 million of residential flats and 24.0
million sq. ft. of office space
o Jaypee Infratech also successfully sold 52.70 mn. sq. ft. in 52 months for the period of
Dec08 Mar13
The project also included plans for developing integrated townships (a city in itself) offering a
bouquet of products catering to high-mid segment which was based on walk to work concept
with world class institutional, recreational & commercial facilities within walking distance of
residential options.

Risk analysis
Land Acquisition (3991 hectare for road + 2500 hectare for ribbon development). The road
project required huge chunk of land across the 6 districts of UP. This was further aided by the
ribbon developments projects like real estate project supposedly to be started by the Jaypee
Group to capture the externalities arising from the road project. The later part was the one which
made the project viable. This huge requirement of the land chunks led to many litigations on the
6 | Page

pretext of acquiring them. These chunks of lands were also claimed to be one of the most fertile
belts across the Yamuna River. Once the real estate prices started soaring, the farmers who had
sold their land initially started feeling cheated. So they wanted to get their land back and so the
legal battle began. The land acquisition began in 2006 but the project could only begin in 2008
due to land litigation issues. Also towards 2010 there were some litigations arising mainly from
the Mathura and Tapple districts of U.P. from where the road was passing.

Environmental (Industrial pollution): The land allocated to the Jaypee Group for ribbon
development was supposed to be assigned as 60% for real estate and 20% for Industries and
20% for Institutions. Though the road itself was perceived to reduce pollution by vehicles by
offering better roads, the developments across the roads were accused of causing
environmental pollution as well as polluting Yamuna River. In a recent statement by the Uttar
Pradesh Pollution Control Board (UPPCB) claimed that they have issued notice to over 240
entities, including education institutes, housing societies and industries, who have started
construction n without taking the pollution clearance from them.

Construction: This was a dream project of one of the Chief Ministers of U.P. It was dreamed
on a grand scale to showcase the Indian technology and advancements. The construction
involved risks in terms of the money and time. Due to political risk and the change of guard
at the help of the state legislature, the project saw unprecedented delay from commencement
to its completion stage. Conceived in 1997 and tenders accepted in 2003, the project took
almost 15 years to complete in 2012. The amount of money spent also rose from the original
bud amount from just over INR 9000 Crore to INR 13300 Crore. When the project was 80%
complete, fresh land litigations in 2010 delayed the project by 1 year when it was supposed
to get completed by 2011. CCTV cameras installed every 5 Kms and patrolling booths every
25 Kms and the quality of the strip (that later handled landing of Mirage 2000 of Air Force in
a test run) was never seen before Indian context.

Demand/Supply Market: As the Yamuna Expressway was on its way of completion, the
national Highway Authority of India (NHAI) awarded a INR 1900 Crore project to Reliance
Infra for renovating their National Highway 2 (NH-2). This highway also connected Delhi
to Agra and ran 185 Kms. So the NH-2 was a direct competition to Yamuna Expressway
(YE). This meant that YE had to compete with NH-2 to get the traffic on itself. YE was a 165
KMs stretch and as an expressway offered reduced travel time. However the major challenge
was the toll rates. The toll rates at YE was 85% higher than that of NH-2. This led to not
many people using the service. Also YE was a access controlled highway, so the number of
access roads it had with the neighboring villages were limited. Also the connecting points
were very far from the villages. So people around YE found it difficult to use the highway.

Financial Analysis of the Project

The project was a high value project. As the project involved huge investments, it was only
imperative to judge the financial viability of the project beforehand. Here the model used to
make the project was different as this project tried to capture the externalities arising from the

7 | Page

road project alone in terms of the real estate developments or other ribbon developments
awarded to the concessionaire.
We have first estimated the cost of capital from the given data from the Jaypee Infratech Ltd.
(JIL). The initial Debt to Equity ratio was 1.6 but that has now changed to 1.2 in the present
context due to repayments of the loans. Below are the calculations showing the weighted average
cost of capital (WACC).

Parameter
Risk Free Interest Rate
Beta

Value
7.00%
1.56

Market Return

15.09%

Expected Return on Equity

19.62%

D/E ratio

1.2

E/V

0.45

D/V

0.55

Cost of Debt

12.50%

Tax Rate

30%

WACC

14%

We projected the cash flows for road project and the real estate projects separately. The road
project estimations were done for both old tariff and new tariff. We then calculated the NPV of
the projects. Below are the findings:
Expressway Valuation (Old Tariff)
Total NPV

255.75

NPV Equity

-4638.4

Project IRR

12.33%

Equity IRR

5.41
Expressway Valuation (New Tariff)

Total NPV
NPV Equity
Project IRR
Equity IRR

-1733.43
-5558.25
6.32%
N/A

As we can see from the old tariff that the road project was viable as per the old tariff but not
viable for the equity investor. As per the revised tariff, the project was not at all viable. The
8 | Page

NPVs were negative. So the project was clearly not viable at this point. The IRRs for the lenders
and the Equity were within reasonable limits but still the nature of the project and the long
gestation period made the project unviable. Here the concept of capturing the externalities was
used and the real estate came into picture. JIL was allocated 5 chunks of lands across the
expressway between Noida and Agra at the cost of acquisition. They could build and sell
apartments or develop it for other commercial purposes subject to the regulation of the Yamuna
Expressway Integrated Development Authority. Out of the 530 million square feet, they have
been able to sell over 50 million square feet and have delivered around 11 million square feet of
property to the buyers till 2013 with further deliveries dating till 2018. The property rates shot
upwards once the construction began and has only went up. The sky high prices meant that the
return on the real estate were going to be huge as compared to the road toll collection. This idea
made the project viable. Below is the figures showing returns from the real estate for the
concessionaire.

Real Estate Valuation

Total NPV
NPV Equity
Project IRR
Equity IRR

14307.7
7144.12
52.2
48.1

Clearly the real estate returns outweighed the negative returns from the road project. So this
project clearly establishes how externalities can be captured to make an unviable project a viable
project. In this case the real estate was used to make the project viable but it may differ from
project to project depending upon the nature of the project and the nature of installation of the
project.

Economic Analysis
Costs:
1. Fertile Land:
Grabbing of fertile land along the Yamuna expressway is a way of wasting the fertile soil
and giving it to real estate business. The opportunity of agriculture productivity is being
lost because of this expressway.
2. Existing Business:
Existing business along the path is getting affected because of the project which is
another cost for Yamuna expressway.
Benefits:
1. Fuel Savings the reduction in the travel time of the vehicle is expected in lower fuel
consumption
2. Reduction in pollution because of less fuel usage
3. Time Savings it contributes to the productivity of the nation
9 | Page

4. Reduced fatalities good roads means lesser possibilities of accidents

5. Economic Development around the expressway through Industries and unban
development
6. Tourism boost one of the main reason for UP Govt. to enter into
The social cost of fertile land and existing business is being overshadowed by social benefits of
fuel savings, pollution and environment control, economic development and improve in tourism,
by doing Yamuna expressway, the externalities have been internalized and project is made
economically viable.

Conclusion and Recommendations

After undergoing this work it was understood that for certain projects to be successful, Yes,
Externality can be a necessity. Project which was conceived in 1997 during 9 th five year plan
period, got completed in 2012 during 12th five year plan period, i.e. the project has taken 15 years
for its completion, and this will actually increase the debt liability of the project. These situations
occur mainly because of two reasons, firstly due to aggressive bidding, secondly delay in the
land acquisition which increases the project cost and make the project financially nonviable. In
such situations the debt restructuring is the most used option to make project viable, apart from
this it can be made financially viable by internalizing the externalities, which was the case in
Yamuna expressway to meet the debt liabilities and made financially viable. Thorough analysis
of this case shows that externalities have to be used in cases where mere project doesnt help to
make them viable.

This doesnt mark end to this work, it is open to continue work to answer following
questions which were unanswered in this work.
Is there need of separate bidding for Real estate and Expressway projects?
Are road development projects viable without real estate?
Should toll tariffs be waived in lieu of high real estate returns in project?
Should Govt. take back portion of land allocated for townships, as enough returns are
generated form current real estate?

10 | P a g e

References
[1] Externality, https://en.wikipedia.org/wiki/Externality
[2] Objectives of project, http://yamunaexpresswayauthority.com/yep
[3] Project details, http://yamunaexpresswayauthority.com/us

11 | P a g e