Transcript Toll Road Financing

Cross-Border Infrastructure: A Toolkit
Toll Road Financing
Session on Finance
Sidharth Sinha
Indian Institute of Management, Ahmedabad
The views expressed here are those of the presenter and do not necessarily reflect the views or policies
of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.
Cross-Border Infrastructure: A Toolkit
Forms of Government Support for Road Concessions
• Land acquisition

Expropriation of right of way for toll road construction. Cost
of land acquired maybe borne either by the government or
the concessionaire.
• Provision of development rights and third-party revenue

This measure involves the transfer of right of commercial
development along the toll road to supplement project
economics. The advantage is that this enhances project
economics but excessive dependence on this measure
may reduce incentive to make the road a success.
Cross-Border Infrastructure: A Toolkit
Government Support for Road Concessions (continued)
• Construction of related facilities
 The government commonly provide for the construction
of connecting roads, access ramp, etc. This contributes
significantly to the project since connecting roads and
other facilities are critical elements for commencement
of operation. However, construction delays may critically
impair the commencement of operation.
• Revenue support
 Revenue support is usually done with a minimum
threshold for compensation paid by the governments
 During construction
 During operation
Cross-Border Infrastructure: A Toolkit
Grant Supported BOTs
Grant During Construction
Extent of
funds
leveraging
Lender
protection
Cash flow
impact from
road agency’s
perspective
Lower, as the grant amount
in capital structure reduces
the amount of equity & debt
raised in the project
Lower
Lender dues entirely met
through toll revenues
Grant amount to be
disbursed by road agency
within a short span of time,
and during actual asset
(road) creation
Grant During
Operations
Higher as the entire
initial project investment
is raised through debt &
equity
Higher part of lender
dues assured through
grant disbursement
during operations
regardless of project
revenues
Grant amount to be
disbursed by road
agency over a longer
period of time, after
creation of asset
Cross-Border Infrastructure: A Toolkit
Government Support for Road Concessions (continued)
• Revenue sharing with existing facilities

Concession agreements which combine the
construction of new stretches with the rehabilitation and
upgrading of an existing stretch

This would address the problem that the new stretches
have low traffic densities making them commercially not
viable.

Existing stretches could generate enough toll revenue to
improve the cash flows of the concessionaire, especially
during the construction stage.
Cross-Border Infrastructure: A Toolkit
Government Support for Road Concessions (continued)
• Shadow toll

Government pays toll to the concessionaires according
to the vehicle - kilometers of the traffic counted
automatically. This provides for a means of introducing
private financing without stimulating resistance to tolling.

Possible financial burden/ fiscal inflexibility in later years
may hinder transition to real tolling.
Cross-Border Infrastructure: A Toolkit
Government Support for Road Concessions (continued)
• Shadow toll (continued)

A modification to the conventional shadow toll model is
suggested, through payment of shadow tolls to the
Concessionaire by the road agency in two tiers:
 A base payment which is assured regardless of
actual traffic on the road;
 An additional payment per vehicle that actually uses
the road
 This provides the concessionaire incentive to
improve the road condition and usage.
Cross-Border Infrastructure: A Toolkit
Fixed IRR or Assured Return
• Guaranteed level of net return on equity/project, taking the
time value of money into account.

If the actual traffic is lower than the projected level, the
concession period will get extended

Although this results in improved project economics, its
effect on current cash flow is negligible.
• Since the fixed IRR model guarantees a return over and
above the costs of the toll road operator, there is less
incentive for cost efficiencies.

Standard problem with rate of return regulation
Cross-Border Infrastructure: A Toolkit
Least Present Value of Revenue
(LPVR) Based Bidding
• The bidding variable is the present value of revenue
throughout the life of the concession that firms are
willing to accept to undertake the project.
• The duration of the concession is then flexible and
depends on the effective traffic levels encountered.
• Encourages operating and capital cost efficiencies as
opposed to fixed IRR mode
Cross-Border Infrastructure: A Toolkit
Implications of LPVR
• Tolls can be adjusted without negotiation with the
concessionaire
• They transfer political and demand-related risks to the
user in the form of an endogenous concession period
• Calculation of compensation payments on concession
termination is straightforward at any point in time during
the concession period.
Cross-Border Infrastructure: A Toolkit
Road Funds
• Ring-fenced government sponsored special purpose
entities

limits amount of liabilities arising from public support to
public-private partnerships projects

assists to improve governance and transparency of the
allocation of government contribution.
• Funded by government’s contribution (tax payers), fuel
cess, user charges & donors-multilateral interventions.
Cross-Border Infrastructure: A Toolkit
Maintenance Road Funds (ADB Report)
• Capital bias

Even when the road budget is adequate for proper
maintenance, maintenance can still be inadequate,
because of capital bias. Politicians want to build new
roads.

‘The public mistakenly thinks the remedy for bad roads is
renewal, not maintenance.’
• Unless a culture of (preventive) maintenance can
become entrenched in a country, road maintenance and
new roads, should not be funded from the same pot.
Cross-Border Infrastructure: A Toolkit
Second Generation Road Funds
• The concept of the second generation road fund and
board is that of an autonomous agency
 controlling
 directed
the funding of road maintenance,
predominantly by road users,
 having
power to raise revenue and control funding
allocations,

having a strong incentive to insist on commercially
and professionally efficient management.
Cross-Border Infrastructure: A Toolkit
Evaluation of Road Funds
Road Funds Revisited:
A Preliminary Appraisal of the Effectiveness
of the “Second Generation” Road Funds, World Bank, 2002
• The paper is based on detailed reviews of experience in seven
African countries in which the World Bank has had some
involvement in the establishment of second generation road
funds

Most countries are still not able to fully fund their desired
levels of road maintenance because of residual controls of
the Ministry of Finance over the level of the fuel tax levy

Many countries are unable to disburse even those funds
that are allocated because of the low absorptive capacity
of the maintenance contracting sector.
Cross-Border Infrastructure: A Toolkit
Evaluation of Road Funds (continued)

Despite this limitation on overall funding, there is already
evidence of increased efficiency in implementation
associated with greater security of funding and extended
private sector contracting.

There is no strong and systematic link between the form of
the fund (user majority on boards, private sector chair, etc)
and their performance (reduction in costs, improvement in
road condition). Even continued reliance on the budget for
a substantial part of funding has not been a particular
impediment.
Cross-Border Infrastructure: A Toolkit
Evaluation of Road Funds (continued)
• “The elements which link and reconcile these conclusions
in our sample of countries is a commitment of
government to

facilitate a more businesslike approach to road
maintenance, and
 ensure that road maintenance receive high priority in
budget allocation.”
• The importance of the creation of the funds has been as
much an indicator of the willingness of the country and a
focus for change of process as an essential mechanism
for efficient maintenance policy.
Cross-Border Infrastructure: A Toolkit
Toll Roads - Case Study:
Noida Toll Bridge Company Limited (NTBCL)
Cross-Border Infrastructure: A Toolkit
Background
• The river Yamuna that runs north-south forms a natural
barrier that restrains expansion of Delhi to the east.
• The New Okhla Industrial Development Authority
(NOIDA) in the neighbouring state of Uttar Pradesh
established a new integrated industrial township in close
proximity to Delhi.
• Noida located east of Yamuna is a township that is under
development since 1976. Today it has become one of the
satellite towns of Delhi.
Cross-Border Infrastructure: A Toolkit
Background (continued)
• The traffic that is generated by this satellite town is
substantial and the interaction with Delhi is also
substantial.
• The traffic between the east of river Yamuna including
Noida and Delhi was of the order of 3,70,000 PCUs
daily in 2002 and was serviced by three existing toll
free bridges.
Cross-Border Infrastructure: A Toolkit
Project Alignment
Cross-Border Infrastructure: A Toolkit
Background (continued)
• 30% of Delhi’s population lives across the river Yamuna
• NOIDA is inhabited by 700,000 people - 50% of whom
commute to Delhi for work
• Population of Noida/Greater Noida will increase manifold
over next few years
Cross-Border Infrastructure: A Toolkit
Project Development
• Infrastructure leasing and financial services (IL&FS),
NOIDA & the Delhi Administration (DA) reached an inprinciple agreement for the implementation of a fourth
bridge across the Yamuna, the Delhi Noida Toll Bridge,
on build, own, operate & transfer (BOOT) basis.
• A tripartite memorandum of understanding (MoU) was
signed between IL&FS, NOIDA, & DA on April 7, 1992
for establishing the new bridge and defining the scope
and mutual obligation of the various partners.
Cross-Border Infrastructure: A Toolkit
Formation of Project Company
• A steering committee consisting of representatives of
 Government
 Delhi
of Uttar Pradesh (GoUP),
Government (DG),
 Ministry
of Urban Affairs and Employment,
Government of India,
 Delhi
Development Authority (DDA),
 NOIDA and
 IL&FS
Cross-Border Infrastructure: A Toolkit
Formation of Project Company (continued)
• Noida Toll Bridge Company limited (NTBCL) was
incorporated on April 8, 1996.
• NTBCL, is a special purpose company promoted by
Infrastructure Leasing & Financial Services Ltd (IL&FS)
for the purpose of development, construction, operation
and maintenance of a bridge across the river Yamuna
connecting Delhi and Noida on a build-own-operatetransfer (BOOT) basis.
Cross-Border Infrastructure: A Toolkit
The Project
• Bridge specifications

An 8 lane link across the river Yamuna
 A 552 meter long main bridge, 3 minor bridges
 8 lane approach roads on embankments
 A 27 lane automated toll plaza
• Time saving: Travel time from south Delhi to Noida
reduced to 5 minutes as against 30/45 minutes via
alternative routes
Cross-Border Infrastructure: A Toolkit
The Project (continued)
• Distance saving: 6-7 kilometers which implies petrol
saving much in excess of toll rate (presently Rs 17/ trip
for cars)
• Least polluted route
• Reduction in pollution/congestion in alternate routes
due to traffic diversion
Cross-Border Infrastructure: A Toolkit
Stakeholders
• Government of India
• Governments of Uttar Pradesh (UP) and NCT Delhi
(entered into a support agreement to the concession
agreement)
• NOIDA - concession grantor
• IL&FS - sponsor
• The World Bank - line of credit to IL&FS
• Kampsax International, Denmark - project consultants
• Mitsui Marubeni Corporation, Japan - EPC contractor
• Intertoll, South Africa - O&M operator
• Users of the bridge
Cross-Border Infrastructure: A Toolkit
Support
Agreement
Govt. of NCT
of Delhi
Govt. of Uttar
Pradesh
NOIDA
Indpt. Engineer
Indpt. Auditor
Concession Agreement
NTBCL
Loan Agreement
Banks/FIs
EPC Contract
Mitsui Marubeni
Corp. Japan
Shareholders
Agreement
O&M Contract
Intertoll
South Africa
Investors
Cross-Border Infrastructure: A Toolkit
Milestones
• Apr 1992: Signing of MOU
• Jun 1993: Appointment of Kampsax
• Jan 1996: World Bank review & approval
• Dec 1996: Delhi Development Authority Technical
Committee approval
• Nov 1997: Concession agreement signed
• Nov 1997: Delhi Urban Arts Commission approval
• Jan 1998: Support agreement
• Jan 1998: EPC contract awarded to MMC
Cross-Border Infrastructure: A Toolkit
Milestones (continued)
• May 1998: Land acquisition completed
• Aug 1998: Regulation authorising toll collection
• Dec 1998: Appointment of O&M contractor
• Dec 1998: Financial close
• Dec 1998: Commencement of construction
• Feb 2001: Commencement of commercial operations
• Oct 2001: Completion of connecting flyover
Cross-Border Infrastructure: A Toolkit
Principal Challenges
• The Delhi Noida Bridge Project was the first large private
sector initiative in the surface transport sector.
• NTBCL had to contend with several governments,
multiple departments, and ever changing political and
bureaucratic interfaces.
• As the first project of its kind, it did not have the
advantage of precedence, either in documentation or with
respect to financing.
• The project was also implemented during a fragile
political and economic environment in the country and
state/s.
Cross-Border Infrastructure: A Toolkit
Concession Agreement - Toll Determination
• Recovery of costs through fees/tolls:
 Right of NTBCL to recover the project costs and
operation and maintenance costs through the levy of
fees over the concession period.
• Fee review mechanism:
 One representative each of NOIDA, the concessionaire
and a duly qualified person appointed by the
representatives of NOIDA and concessionaire who shall
be the Chairman of the committee.

The fees shall be determined by the FRC based on the
CPI for urban non-manual employees.

The fees will be revised on February 1 of each year.
Cross-Border Infrastructure: A Toolkit
Assured Returns
• The concession agreement allows NTBCL to earn an
assured return of 20% net of taxes, calculated on the
total capital employed in rupee terms.
• The capital employed, calculated by the independent
project engineer and independent auditor, includes

project costs

cost of major repairs

shortfall in recovery of assured returns in the preceding
year.
Cross-Border Infrastructure: A Toolkit
Assured Returns (continued)
• The Concession could also be extended by two years
at a time beyond the 30-year stipulated period, in case
the assured returns are not achieved.
• NOIDA has the discretion of granting land development
rights to support any shortfall in revenues required to
earn the assured returns of 20%.
• Once the targeted return has been achieved, the
project facilities would revert to NOIDA for a nominal
value of Re.1.
Cross-Border Infrastructure: A Toolkit
Current Toll Rates (valid till 31 Jan 2007)
The toll rates were arrived at
using:
• willingness to pay surveys
• user benefits & VOC
savings
• user acceptability
• achievement of contracted
returns over concession
period
Vehicle category
Toll Rate
(Rs./Trip)
2 Wheelers
8
Cars/3-Wheelers
17
LCVs
35
Buses/Trucks
40 to 75
Cross-Border Infrastructure: A Toolkit
Support Agreement
• “Support agreement” was signed between the
Government of Uttar Pradesh (GoUP) and the
Government of NCT Delhi (DG) on 14 January 1998.
The salient features of the Support Agreement are:
 Leasing
of the lands pertaining to the project site
and adjacent areas.
 Obtain
all necessary clearances from the Municipal
Corporation of Delhi.
Cross-Border Infrastructure: A Toolkit
Support Agreement (continued)
 Not
to allow construction of any other passage
across the Yamuna which is toll free or charges
lower toll than the Noida Bridge within a radius of 5
kms from the Delhi Noida Bridge site for a period
of 10 years or till the Noida Bridge achieves full
rated capacity, whichever is later, without the
written consent of NTBCL.
• In the event of any breach of the support agreement
GoUP and/or DG shall compensate NTBCL and/or
NOIDA for any costs incurred by them and the lenders
pertaining to the project.
Cross-Border Infrastructure: A Toolkit
O&M Agreement
• O&M contract awarded to M/s Intertoll, South Africa on the
basis of competitive bidding. Key contract features:

US$ 2.3 million equity participation

US$ 2.2 million performance guarantee

Intertoll shares traffic risk with NTBCL – the O&M fee for
first 10 year is directly related to the revenue generation

Revenue leakage capped at 0.1% with strong penalties
• After 10 years the O&M fee will comprise of :

Variable fee @ Rs 0.725 (US$ 0.015) per vehicle

Fixed fee @ Rs 31.9 million (US$ 750,000) per annum
Cross-Border Infrastructure: A Toolkit
Allocation of Risks
• Commercial and revenue risks 
NTBCL
• Sovereign and political risks 
Governments of UP and Delhi
• Time overruns 
EPC contractor
• Operation & maintenance 
O&M contractor
• Natural force majeure 
Insurance
Cross-Border Infrastructure: A Toolkit
Risk Mitigation Framework - 1
Risk
Mitigation
Delay in
completion
• Robust project scheduling
• Liquidated damages/Incentives on contractor
Increase in
costs
• Detailed engineering prior to start of work
• Value engineering during construction phase
Revenue
risks
• Alternative sources of revenue - development rights
• Extension of concession period if assured rate of return not
achieved
Technology • Selection of state-of-art tolling technology designed to
risks
cater for at least 8-10 years
• Periodic upgradation
Interest rate • All debt contracted are based on fixed rate of interest
Cross-Border Infrastructure: A Toolkit
Risk Mitigation Framework - 2
Risk
Revenue
leakage
Mitigation
• Internationally reputed toll management company
• Self auditable toll management system with automatic
vehicle classification (AVC)
• Revenue of operator linked to toll collection
• Operator to make good any loss of revenue
Regulatory
risk (delay in
toll revision)
• Pre-determined formula for revision in tolls
• Independent fee review committee
• Revisions do not require approval of NOIDA/Gov’t.
Natural force
majuere risks
• Insurance policy
Cross-Border Infrastructure: A Toolkit
Risk Mitigation Framework - 3
Risk
Mitigation
Political risks
• Concession agreement provides compensation formula
for various types of direct and indirect political risks
• NOIDA to pay lender’s dues as well as cumulative
equity returns in case of termination due to political
risks
Competing
routes
Inflation
• Delhi Government has undertaken not to build an toll
free facility until project achieves full capacity for a
continuous period of 6 months
• Toll rates linked to consumer price index
Cross-Border Infrastructure: A Toolkit
Financing Plan
Equity
Amount (Rs Million)
IL&FS
360.0
NOIDA
100.0
IFCI
50.0
FCD Issue
207.8
International Funds
400.0
Intertoll (O&M Operator)
106.2
Total Equity
1224.0
Debt
Deep Discount Bond issue
500.0
IL&FS (World Bank L/C)
600.0
RTL from FIs/Banks
1758.0
Total Debt
2858.0
Cross-Border Infrastructure: A Toolkit
Public Issue
• First green-field infrastructure project to raise equity
and debt from capital markets through
 Secured deep discount bonds (DDBs) aggregating
Rs. 500 million
 Secured fully convertible debentures (FCDs)
aggregating to Rs. 207.8 million
• This was also the first initial public offering with take out
financing arrangement
Cross-Border Infrastructure: A Toolkit
Take-Out Financing
• Take-out financing facility offered by IDFC and IL&FS in
the 5th and 9th years at the following rates :
Event
Amount
Yield
End of 5th Year
Rs. 9,500/-
13.70%
End of 9th Year
Rs. 16,500/-
14.19%
Cross-Border Infrastructure: A Toolkit
Class-Wise Traffic Performance No. of Vehicles Per Day
Year ended 31 March
Cars
Two wheelers
Commercial vehicles
Total traffic
2001*
12,050
2002
15,318
2003
26,645
2004
33,483
2005
37,058
2006**
42,056
4,833
6,684
10,969
12,935
14,590
16,828
278
632
860
1128
1213
1299
17,161
22,634
38,474
47,547
52,860
60,184
32%
70%
24%
11%
14%
97,452
103,836
110,274
12.85
11.66
11.68
12.92
13.94
14.62
220,461
262,495
449,340
614,279
736,722
879,942
19%
71%
37%
20%
19%
Growth rate
Projected traffic
Average revenue (Rs.)
Per vehicle
Per day
Growth rate
* with effect from 7 February 2001 ** April 2005 to December 2005
Cross-Border Infrastructure: A Toolkit
Financial Performance
Rs. Million
Year ended 31 March
Total income
Total expenses
Operating profit
Interest/Finance charges
Depreciation
Miscellaneous expenditure
written off
Net profit before tax
Less provision for tax / FBT
Adjusted net profit after tax
and extraordinary items
2001
13
8
5
50
9
2002
118
65
53
426
62
2003
187
82
105
337
63
2004
259
82
176
346
2
2005 30.9. 2005
317
189
91
51
226
138
374
193
2
1
2
(56)
15
(450)
15
(311)
15
(186)
15
(165)
8
(63)
0
(56)
(450)
(311)
(186)
(165)
(63)
Date
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Closing Price
Cross-Border Infrastructure: A Toolkit
NTBCL Share Price History
40
35
30
25
20
15
10
5
0
Cross-Border Infrastructure: A Toolkit
Debt Restructuring
• Original project debt was contracted at an average cost of
15% pa.
• In view of the downward interest rate trends and revised
cash flow projections, the effective cost of term loans was
reduced to 8.5% pa.
• DDBs were restructured w.e.f. Nov 2004 with revised
interest yield of 8.5% pa and are proposed be refinanced in
the current financial year.
• The debt restructuring exercise has been fully completed
and the current carrying cost of debt is 8.5% pa with
complete repayment by 2017.
Cross-Border Infrastructure: A Toolkit
Valuation of Company
• Market capitalization
 =Rs. 35*122.4 million= Rs.4,284 million
• Debt book value = Rs.3,700 million
• Approximate enterprise value
 Rs.8,000 million
• Discounted cash flow value
 15 year cash flows Rs.7,000 million
 Terminal value
Rs.9,426 million
Cross-Border Infrastructure: A Toolkit
Learnings
• Problem of long-term funding to realize value.
• The back-ended revenue profile coupled with high
interest rates lead to restructuring of NTBCL’s debts.
• The concession extension approach assumes that
investors are indifferent about the time period over
which they earn their return.
Cross-Border Infrastructure: A Toolkit
Learnings (continued)
• Financial markets may not offer funds with uncertain
debt service and maturity. In that case, sponsors may
be unwilling to participate in a concession in which the
concession term is uncertain because they would be
unable finance the project.
• This approach is akin to a rate of return regulation and
does not provide incentives for cost minimization.