A perspective …

Toll Roads

Topics for discussion:

Concept of Toll Roads (TR)

Features

Basic Activities involved

Project Structures

Major Risks Involved

Tolling Aspects

Government Support

What’s new

Concept of Toll Roads (TR)

TR are roads which can be used by vehicles on payment of some toll (i.e. rent for use of resources). E.g. DND toll bridge

Exponential growth in vehicle count and paucity of proportionate road infrastructure (in km and quality terms) has led to widespread use of concept

Numerous risks involved

Aid in economic development of surrounding areas

Governments encouraging private initiative in TR (for various benefits that entrepreneurship yields)

Provide funding of other projects

In India, NHAI being the pioneer to adopt the concept and putting it to use on a macro scale with GQ

Features

TR usually developed in urban areas (witnessing traffic congestion) and Highways

May or may not have alternate toll-free road (affect project viability)

Percentage and form of public support varies

Important determinants for success of project:

– Traffic (classified into LMV, HMV, others); and growth rate

– Costs : Construction and Operation; and escalation

– Revenue : Tolls, Public Support, Advertisement, Realty, etc

– Funding: Debt ; Equity

– Duration (of Concession)

Social and rehabilitation aspects

Basic Activities involved

Feasibility – does the idea makes sense?

– Congestion levels

– Existing road infrastructure

– Financial Analysis

Construction

– Type of contractor

• Experienced

• Financially capable

– Timelines (penalties and bonus)

– Cost estimates : as realistic as possible with cushion for escalation

O & M

– Stringent performance standards

– Revised toll rates compel for better O &M

Project Structures …1

Management Contract

– Construction by State or Central government or such agency

– Private Operator is entrusted the responsibility of operating and / or managing the TR

Annuity

– Private builds and operates the road; gets annual payment

– Toll (if any) taken over by government

Build Operate Transfer (BOT)

– Private player develops TR, operates it and transfers back to government on expiry of concession period (usually 25-30 years: sufficient to recover the investment)

– Construction, operation and market risk on private

– Most common form of PPP

– Best suited for projects which have:

• huge construction costs involved

• revenues accruing during entire duration of project

• to be developed with latest technology

Project Structures …2

– Requisites for successful BOT project are:

• Strong project in terms of viability

• Identification and allocation (between public and private) of prominent risks

• Active Government support (mainly for approvals and clearances

• Established Sponsor

• Capable construction contractor

• Robust project structure (determined by concession agreement)

• Appropriate funding (Debt and Equity): Usually debt comprises of 70-90% of total capital

Investors

Off-taker / Consumer

Rating Agency

Operating Agency

Construction Contractor

Project Company /

Concessionaire / SPV

Equity Debt

Insurer

Government Authority

Concession Agreement

EPC/Construction Contract Fees/Toll

O & M Agreement

Funding

A Typical BOT Project Structure

Major Risks involved …1

Completion Risk:

– Availability of land

– Topography of site (soil, etc)

– Availability of raw material, labor, equipment

– Timelines

– Within budgeted costs

Market Risk

– Traffic forecast

– Government Policies (like taxes)

– Existence or development of alternative road or other mode of transport

– Economic sensitivity of people towards toll

Major Risks involved …2

Financial / Revenue Risk

– Revision of toll (at least to cover rise in operating cost)

– Interest Rates and Inflation

– Foreign Currency rates

Operating Risks

– Poor maintenance (leading early wear-n-tear)

– Design/Construction faults

– Labor problems

Clearances

– Environmental

– Rehabilitation

Tolling Aspects …1

Charge : either “per km” or “for entire journey (one way)” or “on basis of weight of vehicle” or combination of any of above

Duration: depends on

– Costs : Construction; Operation and Rehabilitation

– Toll Revenue

– Other objectives

Quantum: to make the project viable

System:

– Manual

– Electronic

Pilferage

Tolling Aspects …2

Form:

– Shadow Tolls : No toll collected from vehicles but paid by govt to operator on basis of traffic count

– Open / Closed tolls

• Open : Toll collected at points along the road; no entry/exit gates

• Closed: Entry and Exit gates for toll collection; requires setting up of infrastructure for gates

Revision in rates

– Guaranteed in BOT projects

– Based on some index (CPI, WPI, etc)

– Yearly or in a few years

Government Support

NHAI Act amended to allow for:

– Private sector participation

Declaring road as an industry: this enhanced bankability of road projects

Declaring Highways as infrastructure sector: for floating Highway bonds

Tax benefits for infrastructure projects and for inputs

Encouraging private sector participation

Model Concession Agreements

What’s new

More and more TR projects

More forms like road/rail river bridges

Private Equity in TR projects

Questions???