Topic Built Operate and Transfer in India

BY. Abhishek ahuja Alok tripathi Apoorv porwal Nidhi singh Shailendre pratap singh

BUILD OPERATE TRANSFER

Build-operate-transfer (BOT) is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project.

The following different parties could be involved in any BOT project: The host government: The government is the initiator of the infrastructure project and decides if the BOT model is appropriate to meet its needs. In addition, the political and economic circumstances are main factors for this decision. The government provides normally support for the project in some form. (provision of the land/ changed laws) The concessionaire: The project sponsors who act as concessionaire create a special purpose entity which is capitalised through their financial contributions.

 Lending banks: Most BOT project are funded to a big extent by commercial debt. The bank will be expected to finance the project on nonrecourse basis meaning that it has recourse to the special purpose entity and all its assets for the repayment of the debt. Other lenders: The special purpose entity might have other lenders such as national or regional development banks Parties to the project contracts: Because the special purpose entity has only limited workforce, it will subcontract a third party to perform its obligations under the concession agreement. Additionally, it has to assure that it has adequate supply contracts in place for the supply of raw materials and other resources necessary for the project

 A project is financially viable for the private entity if the revenues generated by the project cover its cost and provide sufficient return on investment. On the other hand, the viability of the project for the host government depends on its efficiency in comparison with the economics of financing the project with public funds.

For example, the expertise and efficiency that that the private entity is expected to bring as well as the risk transfer. Therefore the private entity bears a substantial part of the risk.

These are some types of the most common risks involved: Political risk : Especially in the developing countries because of the possibility of dramatic overnight political change. Technical risk: Construction difficulties, for example unforeseen soil conditions, breakdown of equipment Financing risk: Foreign exchange rate risk and interest rate fluctuation, market risk (change in the price of raw materials), cost overrun risk

CASE- COIMBATORE BYPASS



CONGESTION AT NH-47(SALEM TO KANYAKUMARI BIA TRISSUM,ERNAKULAM, THIRUBANTHAPURAM)- NEED FOY BYPASS  IN 1974 ALIGNMENT TRANSVERSING 27.67 KMS, LAND FOR A WIDHTh of 40-45 M was acquired, but was delayed beacause of lack of fund.  In 1995 L&T submitted the tendor for development of project on BOT basis. With condition1. addition of bridge over attupalam bridge on NH-47 2. A ROB on NH-209  After discussing it with State Government, finally the bridge across Noyal river was also included.

 

 

Cost of the project- 90 crore L& T was given concession period of 21 years( for bridge) and 32 years( for bypass) to collect toll. Project started in december 1997 Attupalam bridge was opened in december 1998 and bypass in 2000. L&T started collecting tolls from the date of commencement.

People, local truck, taxi owners refuses to pay tolls and demanding concession for frequent user and no tolls on old bridge.  Gov. In an attempt to resolve it issued a proposed concessional rate in 1999:-Rs 50/day for gov. & pvt. Busses -Rs 300/ month for all non commercial vehicle  This was not accepted by L&T  But agreed to subsitized toll rate i.e 50/day/bus irrespective of no. Of trips but the State gov. Will compensate the revenue loss by him.


co. said to made a loss of 20000/day on gov bus alone in 1999. Pressure started by F.I'S who has given 60 crore Financial loss comes to 9 crore(including Interest charges) In june 2000 L&T reported loss of 7.4 crore & requested for compensation GoTN said the loss could have been 55 lakhs only if L&T have agreed to the concession rate.

ISSUES
   

PUBLIC CONSIDERATION DELAY DUE TO TOLL COLLECTION LOCAL TRAFFIC TOLL ON EXISTING BRIDGE

Learning from above two cases

Only one private party bid for the project in spite of many incentives provided by the government A number of reasons may be cited for the failure to attract private participants. Foremost among them is the uncertainty related with toll-based system where the developers are themselves responsible for recovering their investment

Objectives of toll pricing

To recover the capital invested and for generation of additional profits. capital for new infrastructure development road does not attract excess users The tolls collected should be income and tax progressive so the poorer sections of the society are not hurt.

Issues concerned with toll roads:

Toll fixing and increments: As the future vehicular
Access control: Toll roads have to be access controlled. In
density and the willingness to pay cannot be estimated accurately there is problem is fixing toll charge on roads India due to the prevalent political and social systems access control will be very difficult to maintain. The chances of people defaulting on their payment are high

Social impacts: In a country like India where a large

section of the population leaves below the poverty line, implementing toll collection on roads effectively prevents them from using that service.

Criteria for Selection

The financing scheme should take into account the potential demand for road traffic and the peoples willingness to pay Private participation in India cannot be totally ruled out as the road funds itself may not be able to bridge the gap between the demand and supply for roads. The road sector development should also take into consideration the varied political, social and economic atmosphere in different parts of the country case-MSRDC and the Coimbatore bypass

ALTERNATIVES TO TOLL ROADS:

SHADOW TOLLING
Shadow tolling refers to the policy of paying the private investor a variable revenue stream over time depending upon the usage of the road. The revenue stream depends upon the types of vehicle passing on the road and the distance traveled. OBJECTIVES: Traffic risk can be transferred to the private participant  Traffic levels are not impaired by real tolls or toll increases and hence the problems of traffic diversion and road congestion are eliminated  Multiple sources of revenues can be drawn upon to contribute to a shadow toll fund

Feasibility of shadow tolling in India:

y

Shadow based tolling is not feasible in India simply for the fact that private participants are not ready to take up all the risks These risks are mainly associated with the uncertainty involved in traffic density, which cannot be explicitly projected The constant revenue stream, which has been promised to the private participant, has to come from sources like road funds or special tax assessments on users. Hence shadow based tolling is just another form of cross subsidization It also involves setting up of expensive mechanical vehicle estimation points which may lead to harassment of road users and corruption on part of the regulating body

Annuity based scheme



This at present is considered to be the most viable scheme for attracting private participants. Due to the lukewarm response to its BOT scheme the National Highway Authority of India is actively pursuing this alternative  Since most of the private participants are risk averse the annuity scheme provides an attractive proposition to the private participants to invest in the road sector  This scheme guarantees a fixed income to the private participant every year during the concession period There are two methods two finance this scheme so as to provide a constant income to the private participant

-In the first method the government takes up the responsibility of collecting the tolls and provides a constant income to the private participant from the revenue generated through tolls. -A dedicated Central Road Fund is created and the private participant is paid through revenues generated through this fund. A Central Road Fund also exists in India, which has been created by levying 1 Rs. on petrol and High Speed Diesel for the National Highway Development Project (NHDP). Annuity based tolling has its own sets of problems. The foremost question is if the dedicated central road fund is enough to finance all the annuity-based projects. There is also the problem of leakage of funds and the management and the distribution of funds

Road Fund and BOT Scheme



Another alternative is to allow the private participant to invest in all those projects that they feel are financially viable on a BOT basis The private participant will recover his investment by levying tolls The cost of land acquisition, environmental clearance, shifting of utilities and other legal issues will be borne by the government so as to make the project more attractive to private participants The central road fund will be used to develop all those areas where the private parties are not willing to venture This alternative has the advantage of the both the government and the private participant actively participating in road sector development. With investment from the private sector coming in areas, which they feel, are financially feasible, the government will have more funds left for development of relatively backward and financially unviable region.

RECOMMENDATIONS
After evaluating all the options we feel that the best alternative is the financing of road sector is through a two-tier scheme combining both BOT contract with the private sector and the use of the Central Road Fund. The two-tier scheme will finance part of the road sector development through the central road fund and the other through BOT contract with the private sector. GUIDELINES: The private sector should be allowed to invest in all those projects only which they feel are financially viable and will give them an adequate return on investmen

The government may here encourage private participation by bearing the cost of acquisition of land, shifting of utilities and the cost of environmental and legal clearance. The Central Road Fund should be used for all those projects where no private players are willing to invest. Private sector investment in India is still at an infancy state and hence the government still has an important role to play.

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