Presentation on “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.

Due to the long-term nature of the arrangement, the fees are usually

raised during the concession period. The rate of increase is oftentied to a combination of internal and external variables, allowing the proponent to

reach a satisfactory internal rate of return for its investment.

BOT-BUILD OPERATE TRANSFER

BOT Benefits

• BOT offers attractive business benefits over the traditional offshore subsidiary path, including:

• Rapid scaling of operations• Wider service offerings, quickly filling business model gaps• Lower infrastructure set-up costs• Reduced time to operations through utilization of knowledgeable 3rd• party management resources responsible for:

• Real Estate• Government rules and regulations

• Cultural transition• IT infrastructure procurement

• Security

BOT PROJECTS• A BOT Project (build operate transfer project) is typically used to develop a

discrete asset rather than a whole network and is generally entirely new or greenfield in nature (although refurbishment may be involved). In a BOT Project the project company or operator generally obtains its revenues through a fee charged to the utility/ government rather than tariffs charged to consumers. A number of projects are called concessions, such as toll road projects, which are new build and have a number of similarities to BOTs.In general, 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. Even if the host government could borrow money on better conditions compared to that of the public sector, other factors could offset this particular advantage. For example, the expertise and efficiency 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

VARIOUS RISKS

• POLITICAL RISKespecially in the developing countries because of the possibility of dramatic overnight political change.

• TECHNICAL RISKconstruction difficulties, for example unforeseen soil conditions, breakdownof equipment.

• Financing riskforeign exchange rate risk and interest rate fluctuation, market risk (change in

the price of raw materials), income risk (over-optimistic cash-flow forecasts), cost overrun risk

Case Study 1:Delhi Gurgaon

Expressway

• The National Highways Authority of India (NHAI), under the Ministry of Road Transport & Highways, was entrusted the responsibility for implementation of the Golden Quadrilateral project (Highway Project connecting the four metro cities of New Delhi, Mumbai, Chennai and Kolkata).

• As a part of this project, it proposed the conversion of a very busy section of NH-8 connecting Delhi to Gurgaon into a 6/8 lane access controlled divided carriageway.

• The project was awarded to the consortium of Jaypee Industries and DS Construction Ltd to design, finance, construct, operate and maintain the facility for a concession period of 20 years.

• The Concessionaire is allowed to collect toll from the users of the project facility during the operation period to recover his investment and the expressway is required to be transferred back to the Government at the end of the concession period.

• This was the first BOT project in India to have been awarded on negative grant basis where in the concessionaire offered to pay an upfront fee to NHAI in return of the concession as against a capital grant from the Government.

• The expressway was commissioned in January 2008 after much delay primarily owing to issues in Land acquisition and changes in the scope of work.

1.1 Project Description

1.2 PPP structure of the Project

• The project was awarded to the consortium of Jaiprakash Industries Ltd and DS Construction Ltd on Built-Operate-Transfer (BOT) basis for a period of 20 years.

• The selected concessionaire offered to pay 61.06 crore upfront as negative grant to the NHAI.

• The Concessionaire was required to design, construct, operate and maintain the expressway in accordance with the specifications as approved by NHAI.

• A Special Purpose Vehicle called the Delhi Gurgaon Super Connectivity Ltd (formerly Jaypee DSC Ventures Ltd.), was created for execution of the project.

• The SPV entered into a fixed time-fixed price Engineering, Procurement & Construction (EPC) contract with DS Constructions Limited for this project.

1.3 Current Status• The expressway has been operational for 5 years now after it was opened to traffic in

January 2008. • It carries more than 180,000 PCUs per day, which is much higher than the traffic

estimates for the project by 13,000 to 15,000 PCUs per day. • The substantially higher number of vehicles using the facility has often led to a

queuing up of vehicles at the toll plazas.• The expressway consists of 9 flyovers, 4 underpasses and 2 foot-over bridges and 3

toll-plazas.• Smart tags have been introduced to enable cashless automatic payment.

1.4 Financing InformationThe funding for the project at the time of financial closure (9 May 2003) is provided below:• Particulars Amount1. Debt 383.3 crore2. Equity 164.2 crore3. TOTAL 547.5 crore

1.5 Process Analysis

1. Inception:• The plan for an expressway connecting Gurgaon and Delhi was initiated in the late 1990s and

a detailed project report was prepared for the same.• Golden Quadrilateral project, as traffic intensity on these corridors had increased manifold

which hampered safe and efficient movement of vehicles.• Accordingly, NHAI decided to upgrade the section of NH-8 connecting Delhi and Gurgaon

into 8/6 lane access controlled expressway as it was the busiest part of the highway. • It was estimated that the expressway would reduce the travel time between the Delhi and

Gurgaon from about 65 minutes to around 20 minutes.• NHAI was finding itself constrained to fund the estimated Rs 555 Crore for the expressway. • Malaysia’s Construction Industry Development Board (CIDB) was initially proposed to take

up this project under the memorandum of understanding (MoU) route as a part of a government to government initiative.

• However, this proposal sought a grant of Rs120 crore from NHAI and was thus rejected.• The Government of India, at the time, was keen to promote public private partnership (PPP)

in viable expressway projects to attract funding and capitalize on private sector efficiency. • It was therefore decided to undertake the project on BOT (Build-operate-Transfer) basis. • NHAI used the Detailed Project Report prepared in 1998 for the traffic projections for this

project.

2.Procurement• The MoRT&H invited pre-qualification bids in 2001. • The project was initially envisaged to require a capital grant to be paid by NHAI to the

successful bidder towards the cost of construction for enhancing the viability of the highway project.

• However, considering the robust traffic projections,bids were received with negative grants. • In April 2002, the consortium of Jaiprakash Industries and DS Constructions was declared

the successful bidder. • RBM Malaysia, which was the L2 bidder, had quoted Rs 55 crore as the negative grant. • Other bidders were Gamuda Malaysia, IJM Malaysia and Larsen & Toubro (L&T).

3.Development• The erstwhile Jaypee DSC Ventures Ltd. (now known as Delhi Gurgaon Super Connectivity

Ltd.),the SPV incorporated by the Concessionaire for the project, achieved financial closure in May 2003.

• The construction of the expressway commenced in January 2003.• In June 2004, Jaiprakash Industries, despite being the lead promoter, sold its stake to DS

Constructions and retained only 1.2%.• The project development, however, soon ran into issues over approvals, land acquisition and

additions to the scope of work which was largely due to the physical setting of the project highway.

4.DeliveryThe project was commissioned on 25 January, 2008. The expressway is fully operational and ishandling a significant traffic volume of more than 180,000 PCUs per day, growing at 9% year-on-year.

5.ExitThe concession period is for 20 years and the projected end date is 11 January 2023 when theexpressway will be handed over to the government.

1.6 Post facto VfM analysis

One of the limitations to this analysis is the lack of access to the feasibility report for the projectwith which to draw quantitative comparisons. Secondly, the expressway has been in operationfor only two years, thus limiting the possible analysis of efficiencies during the operations period.Therefore, an assessment of potential benefits achieved by the Concessionaire based on publiclyavailable information has been attempted.

Efficiencies Achieved:

Particulars Earlier Now• Average Travel Speed 25.65Km/Hr 66 Km/Hr• Average Travel Time from Delhi to Gurgaon 65 Minutes 25 minutes• Capacity • (in terms of lanes) 6 Lane – 5 km- 8 Lane - 22.3 Km 4 lane -22.7km 6 Lane - 5.4 km• Intersections 20 Intersections 10 Grade Separated

Intersections

Case Study :Vadodar Halol Toll Road Project

VHTR was an initiative commissioned as a part of the Vision 2010 – an infrastructure master plan developed by the Government of Gujarat (GoG).

The project involved widening and strengthening of 32 km of the existing two-lane State Highway (SH 87) connecting Vadodara to the industrial town of Halol into a four-lane tolled expressway.

The underlying principle of the vision was to develop infrastructure projects in Gujarat by attracting private sector participation.

About the project

Project details The Roads and Buildings Department (R&B), GoG and Infrastructure Leasing and Financial Services (IL&FS) signed a Memorandum of Agreement (MoA) to this effect on 31st October 1995.

A special purpose vehicle (SPV) was constituted for this purpose named the Vadodara Halol Toll Road Company Limited (VHTRL)

The construction of VHTR commenced on 1st March 1999 and completed on 15th September 2000.

The toll operations commenced on 24th October 2000. VHTRL manages, operates and maintains the road for 30 years starting from 2000.

It entered into a concession agreement with GoG to design, finance, build, operate, maintain, and transfer the facility after recovery of a predetermined return.

Construction included the design and completion of the road, pavement, cross drainage system, bridges, toll facilities, medians, separators, road furniture, and horticultural aspects.

Management, operation and maintenance toll collection, operating the toll plaza, traffic regulation and maintenance of the facility , special maintenance activities such as eliminating potholes in the pavements,

The concession is for a period of 30 years

In case VHTRL is unable to recover the total cost of the project, including a 20% return, within 30 years from the date of operation, the concession period shall, at the request of VHTRL, without qualification be extended by GoG for a period of two years at a time until the total project cost and returns have been recovered by VHTRL

The land for the project is leased to VHTRL by GoG through a lease agreement between the parties.

Current statusProject operational since 2000

But the traffic on road not I line with the expected traffic levels

the financial condition of VHTRL started deteriorating

was unable to service its debt obligations.

Financing InformationThe cost of the project was 161 crores.

construction cost accounted 119 crores.

Equity of ` 67.9 crores was raised from GoG

IL&FS also raised debt of ` 93.2 crores through various Indian financial institutions including Industrial Development Bank of India,

Post facto VfM analysis: first projects being executed through a public private partnership framework which not only exposed the state government machinery to a new development paradigm but also paved way for a large number of future projects being executed through the PPP framework.

created a platform for private developers to participate in infrastructure building in the country.

It was completed within the 18months as was stipulated in the contracting arrangement

The original estimated cost of the project was approximately 175 crores.The actual landed cost of the project was 160 crores.

Hence both time and money effective and efficient

Key Learning and ObservationsPre-development market assessment is critical : more robust,

For instance, the traffic estimations forthe project were based on the assumptions that the industrial incentives available for the area would continue for long-term. Eventually, with time the incentives were withdrawn and the traffic was almost 50% lower than the projected traffic. Such unaccounted risk factors can jeopardize the project and lead to significant losses.

Competitive bidding can ensure a “better deal”

extremely critical

VHTR was developed through a MoA between the GoG and IL&FS and did not create adequate competitive tension since there were no precedents that were available to develop such a structure.

Need to create a balanced risk return profile:

The risk return profile of the project was skewed in favour of the private developer. For instance, the concession agreementensured that the private developer earned toll revenues till he was able to achieve a return of 20% on the overall investment.

Environmentally and Socially responsive development framework:

was the first project that introduced Environmental and Social Safeguards measures as part of the contractual obligation of the developer. This created a benchmark and had immense demonstration value since it highlighted that infrastructure can be developed in an environmentally and socially responsible manner.

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