POLITICAL RISKRisk Factor Affecting Certainties Of

Cash Flow & Its Mitigation

The Coimbatore Bypass Road Project

Presented by:Neha JainMBA(BIOTECH)

Submitted to :Mr.Sumit Khemka13th september 2010

Contents

•Political risk – brief overview•Mitigation of political risk•The Coimbatore Bypass Project – brief

overview•Political Risk in the project

Political Risk• Political risk refers to the complications businesses

and governments may face as a result of what are commonly referred to as political decisions or any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.

• 2 types: Macro level and Micro level.• Key forms of political risk : a. Non payment or currency inconvertibilityb. Confiscation, expropriation or nationalizationc. War or civil disturbanced. Breach of contract.

Mitigation of Political Risk

• Carefully structured contract• Post-hoc litigation and retaliation• Implementation of a contingency plan• Exit from the market• Involve development financial institutions

Organizations

• World Bank Group Structures (IDA)• International Finance Corporation (IFC) • MIGA • Private Insurers • DFI’s/ECA’s

The Coimbatore Bypass Project• On BOT basis, between Neelambur in Tamilnadu and

Madukkarai in Kerala, 28-km long two-lane bypass road.

• L&T set up an SPV - L&T Transportation Infrastructure Ltd. (LTTIL).L&T held 100% equity in LTTIL.

• Construction started in January 1998 and completed in 22 months time.

• Project cost about Rs.1.04 bn. project was financed by share capital of Rs 416 mn and term loan of Rs 620 mn, with a debt-equity ratio of 1.5:1.

• State Bank of India (SBI), L&T Finance, Housing and Urban Development Corporation (HUDCO), Housing Development Finance Corporation (HDFC), and Industrial Development Bank of India (IDBI).

• The loan was given in two tranches of Rs.150 mn each at 15% interest each. Principal repayment was to begin from the eighth year onwards.

• The bulk users of the bridge including the state transport corporations of TN and Kerala refused to pay tolls.

• TN state government backtracked and sought concessional tariff for state transport buses, L&T agreed to the subsidized toll rate on the condition that the state government compensated the revenue losses sustained by the company.

• A loss of Rs.20000 per day on government vehicles alone.  The Coimbatore District Bus Owners Association (CDBOA) and the Lorry Owners Association refused to pay even the subsidized tariff.

• Since December 1998, L&T was unable to collect the tolls from road users and this resulted in a loss of Rs.74.1 mn as of June 2000. This included Rs.11.4 mn due from the Tamilnadu government towards reimbursement of losses incurred out of the subsidized toll.

Political Risk in the project

• Lack of political will.• Non payment of the subsidized toll

Options for L&T: 1. request the state government to take over the

project.2. force majeure clause 3. pulling out of the project

Bad signal to the industry and financial institutions for future projects in the state and also for other BOT projects in country.

Thank you