Public Private Partnershipin National Highways:
Indian Perspective

11

Discussion Paper 2013 • 11
Gajendra Haldea

Planning Commission,
Government of India

Public Private Partnership in National
Highways:
Indian Perspective

Discussion Paper No. 2013-11

Prepared for the Roundtable on:
Public Private Partnerships for Funding Transport Infrastructure:
Sources of Funding, Managing Risk and Optimism Bias
(27-28 September 2012)

Gajendra HALDEA
Planning Commission, Government of India

April 2013

THE INTERNATIONAL TRANSPORT FORUM
The International Transport Forum at the OECD is an intergovernmental organisation with
54 member countries. It acts as a strategic think-tank, with the objective of helping shape
the transport policy agenda on a global level and ensuring that it contributes to economic
growth, environmental protection, social inclusion and the preservation of human life andwell-being. The International Transport Forum organises an annual summit of Ministers
along with leading representatives from industry, civil society and academia.
The International Transport Forum was created under a Declaration issued by the Councilof Ministers of the ECMT (European Conference of Ministers of Transport) at its Ministerial
Session in May 2006 under the legal authority of the Protocol of the ECMT, signed in
Brussels on 17 October 1953, and legal instruments of the OECD.
The Members of the Forum are: Albania, Armenia, Australia, Austria, Azerbaijan, Belarus,
Belgium, Bosnia-Herzegovina, Bulgaria, Canada, Chile, China, Croatia, the Czech Republic,
Denmark, Estonia, Finland, France, FYROM, Georgia, Germany, Greece, Hungary, Iceland,
India, Ireland, Italy, Japan, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta,
Mexico, Moldova, Montenegro, the Netherlands, New Zealand, Norway, Poland, Portugal,
Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine,
the United Kingdom and the United States.
The International Transport Forum’s Research Centre gathers statistics and conducts
co-operative research programmes addressing all modes of transport. Its findings arewidely disseminated and support policymaking in Member countries as well as contributing
to the annual summit.
Discussion Papers
The International Transport Forum’s Discussion Paper Series makes economic research,commissioned or carried out at its Research Centre, available to researchers andpractitioners. The aim is to contribute to the understanding of the transport sector and toprovide inputs to transport policy design. The Discussion Papers are not edited by theInternational Transport Forum and they reflect the author's opinions alone.
The Discussion Papers can be downloaded from:www.internationaltransportforum.org/jtrc/DiscussionPapers/jtrcpapers.html
The International Transport Forum’s website is at: www.internationaltransportforum.org
For further information on the Discussion Papers and other JTRC activities, please email:itf.contact@oecd.org

This document and any map included herein are without prejudice to the status of or sovereignty over any territory,
to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

TABLE OF CONTENTS
1. PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS: ............................ 5
INDIAN PERSPECTIVE ............................................................................... 5
Overview of Indian Roads .......................................................................... 5
Investment in Roads Sector ....................................................................... 5
National Highways Authority of India (NHAI) ............................................... 6
Public Private Partnership in National Highways ............................................ 7
Models of PPP adopted in India .................................................................. 7
Model Documents ..................................................................................... 8
Formulation, Appraisal and Approval of PPP projects ..................................... 9
Viability Gap Funding (VGF) ....................................................................... 9Toll Policy Framework ............................................................................. 10
Conclusion............................................................................................. 10
2. ANNEX: MODEL CONCESSION AGREEMENTFOR HIGHWAYS, AN OVERVIEW ............................................................... 11
Rationale for phased development ............................................................ 11
Technical parameters .............................................................................. 12
Concession period .................................................................................. 12
Selection of Concessionaire 0 ................................................................... 13
Grant .................................................................................................... 13
Concession fee ....................................................................................... 13
Risk allocation ....................................................................................... 13
Financial close ....................................................................................... 14
User fee ................................................................................................ 14
Local traffic ........................................................................................... 15
Construction .......................................................................................... 15
Operation and maintenance ..................................................................... 15
Right of substitution ............................................................................... 15
Force majeure ....................................................................................... 16
Termination ........................................................................................... 16
Monitoring and supervision ...................................................................... 16
Support and guarantees by the Government .............................................. 17
Miscellaneous ........................................................................................ 17
Conclusion............................................................................................. 17

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

3

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

1. PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:
INDIAN PERSPECTIVE

Overview of Indian Roads
India’s road network of over 4.1 million km is second largest in the world consistingof expressways, national highways, state highways, major district roads and other roads.
These roads carry about 65 per cent of freight and 80 per cent of passenger traffic.
National highways constitute only 1.7 per cent of the road network, but carry about 40
per cent of the total road traffic. Road Transport has emerged as the dominant segment
in India’s transportation sector with a share of 4.7% in India’s GDP in 2009-10. The
number of vehicles on Indian roads has been growing at an average pace of 10.16% perannum over the last five years. Hence, development of road network assumes
paramount importance in the context of a rapidly growing economy.
Investment in Roads Sector
Investment in the roads sector during the Tenth Five Year Plan (2007-12) and the
Eleventh Five Year Plan (2007-12) are shown below:
Table 1. Investment in Roads Sector ( 10th and 11th Plan)
Tenth Plan (2002-07)
In Rs*(crore)

In $**(million)

Eleventh Plan (2007-12)% ShareIn Rs(crore)In $(million)%
Share

Centre71,536

17,88446.87

1,55,367

38,842

42.94

State

68,143

17,03644.65

1,34,246

33,561

37.10

Private12,937

3,234

8.48

72,20918,052

19.96

Total

1,52,616

38,154100

3,61,822

90,456100* 2006-07 prices**An exchange rate of $ 1= Rs 40 has been used for comparison at 2006-07 prices.

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

5

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

National Highways Authority of India (NHAI)
The National Highways Authority of India (NHAI) was established as a statutory
entity under the National Highways Authority Act 1988 for development, maintenanceand management of National Highways. Its initial mandate was restricted to a few
projects undertaken with external assistance. From 1998 onwards, the Government has
been implementing the National Highways Development Programme (NHDP) comprising:
Phase I: Augmenting the Golden Quadrilateral connecting the four largest
metropolis.
Phase II: Augmenting the North-South and East-West corridors.
Phase III: Four-laning of high density national highways connecting state
capitals and places of economic, commercial and tourist importance.
Phase IV: Upgradation of single-lane roads to two-lane standards.
Phase V: Six-laning of four-laned highways.
Phase VI: Construction of 1,000 km of expressways.
Phase VII: Construction of ring roads, by-passes, underpasses, flyovers, etc.
Table 2. The status of the different phases of NHDP as on 30 th June 2012

Total
length(km)
Already
2/4/6
Laned
(km)
Under
implementation(km)
Balance
Length for
Award
(km)

Phase I

Phase II

Phase III

Phase IV

Phase V

Phase VI

Phase VII

Total

5,846

7,300

12,10914,799

6,500

1,000

700

48,254

5,842

6,031

4,071

2

1,052

-

16

17,014

4

691

6,198

3,316

3,028

-

25

13,262

-

420

1,840

11,481

2,420

1,000

659

17,820Source: www.nhai.org

6

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Public Private Partnership in National Highways
Owing to constraints of public funding, Public Private Partnership (PPP) has come toplay a major role in the development of national highways. The National Highways Act,
1956 was amended in 1995 with a view to enabling private investment in development,
maintenance and operation of highways. The Government initiated several othermeasures in this direction such as declaration of road sector as industry to facilitateborrowing on easy terms and reduction in the custom duties on construction equipment.
Models of PPP adopted in India
The two models of PPP adopted in India for the development of National Highways
are BOT (Toll) and BOT (Annuity).
(a) BOT (Toll) Model: In the BOT (Toll) model, the Concessionaire recovers his
investment by charging toll from the users of the road facility. This model reduces the
fiscal burden on the government while also allocating the traffic risk to theConcessionaire. This is the model used for most of the projects and can be regarded as
the default model for highway projects.
(b) BOT (Annuity) Model: Under a BOT annuity model, the Concessionaire isassured of a minimum return on his investment in the form of annuity payments. The
Concessionaire does not bear the traffic risk and the Government bears the entire risk
with respect to toll income.
Table 3. Projects awarded under BOT (Toll) and BOT (Annuity)during Eleventh Five Year Plan
BOT (Toll)
Year

BOT (Annuity)

No of Projects

Length (km)No of Projects

Length(km)2007-08

8

1,109

1

36

2008-09

8

643

-

-

2009-10

34

3,085

3

177

2010-11

28

3,057

20

1,577

2011-12

47

6,231

2

247

Total

125

14,12626

2,037

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

7

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Model Documents
Creation of a standardised framework helps in ensuring transparency in the
allocation of risks and providing clarity and predictability in the obligations of theConcessionaires while minimising the possibilities of disputes. It enables robust
competitive bidding for individual projects with a reasonable commonality in approachacross projects.
The adoption of standardised documents such as the Model Concession Agreement,
RFQ, RFP and Manuals of Standards and Specifications have streamlined and accelerated
decision making and implementation. The standardised documents are briefly described
below:
1.

Model RFQ (Request for Qualification) - A two stage bidding process has
been adopted for PPP projects. In the first stage, that is the RFQ stage, theeligible and prospective bidders are pre-qualified. The second stage is RFP or thebidding stage.
The Model RFQ document lays down the norms, principles and parameters to befollowed for prequalification of bidders in a fair and transparent manner with lowtransaction costs. The RFQ document aims at identification of experienced
bidders who have the requisite technical and financial capacity for undertaking
the project. The technical capacity is mainly determined on the basis of past
relevant experience of the firm. The financial capacity is determined on the basisof net worth of the firm.

2.

Model RFP (Request for Proposal) - The Model RFP document addresses the
key requirements that must be observed for conducting a fair and competitive
bidding process. The response sought at this stage is restricted to financial
offers only, requiring the bidder to quote on the basis of a single bidding
parameter. The detailed terms of the project are specified in the Concession
Agreement which forms an integral part of the Bid Documents to be provided tothe bidders along with the RFP document.

3.

Model Concession Agreement (MCA) - The MCA spells out a precise policy
and regulatory framework for implementing a PPP project. The MCA addresses
the critical issues of a PPP framework such as mitigation and unbundling of risks;
allocation of risks and rewards; symmetry of obligations between the principal
parties; precision and predictability of costs and obligations; reduction oftransaction costs; force majeure; and termination. The technical parameters are
based mainly on output specifications, as these have a direct bearing on thelevel of service for users. The MCA specifies only the core requirements ofdesign, construction, operation and maintenance of the Project Highway whileleaving enough room for the Concessionaire to innovate and add value. Moredetail is provided in the Annex below.
The MCA allocates risks to the parties that are best suited to manage them. The
commercial and technical risks relating to construction, operation andmaintenance as well as the traffic risks are allocated to the Concessionaire. All
direct and indirect political risks are assigned to the Authority. The MCA also
stipulates a time limit of 180 days (extendable up to another 120 days on
payment of a penalty) for achieving financial close failing which the bid security
is to be forfeited.

8

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

A balanced and precise mechanism for determination of user fee has been
specified for the entire concession period since this would be of fundamental
importance in estimating the revenue streams of the project and, therefore, its
viability. The MCA provides for indexation of the user fee to the extent of 40 per
cent thereof linked to WPI. In the event of termination, the MCA provides for
substitution of the Concessionaire by the senior lenders, failing which acompulsory buy-out by the Authority.
4.

Manual for Specifications and Standards - The MCA requires theConcessionaire to bear the responsibility for detailed design. However, since theaccountability for providing safe and reliable roads rests with the Government,
the MCA mandates a Manual of Standards and Specifications that theConcessionaire must adhere to. The Manual specifies only the core requirementsof design, construction, operation and maintenance of the project highway andthe Concessionaire is free to bring in innovations in the design to arrive at therequired output or delivery of service. The Manual, by reference, forms an
integral part of the MCA and is binding on the Concessionaire.

Formulation, Appraisal and Approval of PPP projects
Since PPP projects need to undergo extensive due diligence, guidelines for theirappraisal and approval have been devised. These guidelines apply to all PPP projects
sponsored by Central Government or its entities. Under these guidelines, an interministerial PPP Appraisal committee (PPPAC) has been set up for appraisal of PPP
projects. The Ministry of Finance is responsible for examining the concession agreementsfrom the financial perspective while a PPP Appraisal unit (PPPAU) in the Planning
Commission undertakes a detailed appraisal of each project.
The sponsoring Ministry identifies the projects to be taken up through PPPs andundertake preparation of feasibility studies, project agreements, etc. with the assistanceof legal, financial and technical experts, as necessary. The proposal is first submitted for‘in principle’ clearance of PPPAC. After the ‘in principle’ clearance, the Ministry invites
expressions of interest in the form of Request for Qualification (RFQ) which is followed byshortlisting of pre-qualified bidders. After formulating the draft RFP, the sponsoring
Ministry seeks clearance of PPPAC before inviting the financial bids. Based on therecommendations of PPPAC, the final approval for a project is granted by the competentauthority. In cases where the PPP project is based on a duly approved Model Concession
Agreement (MCA), ‘in principle’ clearance by the PPPAC is not necessary. In such cases,
approval of the PPPAC is to be obtained before inviting the financial bids.
Viability Gap Funding (VGF)
To bridge the viability gap of infrastructure projects undertaken through PPPs, theGovernment is implementing a scheme called the ‘Scheme for Financial Support to Public
Private Partnerships in Infrastructure’. The scheme is applicable only when theconcession is awarded to a private sector company which is selected through open
competitive bidding and is responsible for financing, construction, maintenance andoperation of the project during the concession period. Viability Gap Funding (VGF) is thequantum of financial support provided in the form of a capital grant at the stage of
project construction and is equivalent to the lowest bid for capital subsidy, but subject toa maximum of 40 per cent of the total project cost.

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

9

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Toll Policy Framework
Toll collection for use of the redeveloped and augmented sections of national
highways was introduced in 1997 under the provisions of the National Highways Act.
Subsequently, based on the experience gained, new toll policy was formulated and the
National Highways fee (Determination of rates and Collection) Rules 2008 was notified on
December 5, 2008.
a) The main features are as follows:b) A uniform rate of user fee is charged on all sections of the NHs having two or
more lanes, permanent bridges, bypass or tunnel forming part of National
Highways;c)

Discounted user charges are levied for multiple journeys in a day or on amonthly basis for residents living in the nearby areas; andd) Local residents are entitled to a steep discount for short journeys.
Conclusion
There is a broad consensus in India that Public Private Partnership is the way
forward for creation of world class highways. Since an enabling framework is a prerequisite for attracting competitive private investment, the model documents, theappraisal process and the viability gap funding scheme have been adopted as the
supporting pillars of a strong and sustainable PPP framework in the highway sector.

10

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

2. ANNEX: MODEL CONCESSION AGREEMENT FOR HIGHWAYS, AN OVERVIEW

A comprehensive framework is a pre-requisite for PPP
The highways sector in India is witnessing significant interest from both domestic aswell as foreign investors following the policy initiatives taken by the Government of India
to promote Public Private Partnership (PPP) on Design, Build, Finance, Operate andTransfer (DBFOT) basis. A comprehensive policy and regulatory framework necessary foraddressing the complexities of PPP, and for balancing the interests of users and investors
has been adopted in the form of a Model Concession Agreement (MCA) and standard
bidding documents.
The MCA addresses the issues which are typically important for investors as well as
for limited recourse financing of highway projects, such as mitigation and unbundling ofrisks; allocation of risks and rewards; symmetry of obligations between the principal
parties; precision and predictability of costs and obligations; reduction of transaction
costs; force majeure; and termination. It also addresses other important concerns suchas user protection, independent monitoring, dispute resolution and financial support fromthe Government.
The MCA also elaborates on the basis for commercialising highways in a planned andphased manner through optimal utilisation of resources on the one hand and adoption ofinternational best practices on the other hand. The objective is to secure value for publicmoney and provide efficient and cost-effective services to the users.
Rationale for phased development
Phased development will be affordable and cost-effective
The four critical elements that determine the financial viability of a highway project
are traffic volumes, user fee, concession period and capital costs. As the existing
highways have dedicated traffic and the Government has prescribed the user fee foruniform application across India, revenue streams for a Project Highway can be assessedwith a fair degree of accuracy. The concession period, on the other hand, can beextended only marginally for improving project viability as the growth of traffic would not
permit very long concession periods. In any case, the present value of projected
revenues, after say 20 years, is comparatively low from the Concessionaire’s
perspective.
As three of the four above-stated parameters are predetermined, capital cost is thevariable that determines the financial viability of a project. Bidders would, therefore,
seek an appropriate capital grant/subsidy from the Government in order to reduce thecapital cost for arriving at an acceptable rate of return.

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

11

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

In the given scenario, higher the capital cost, greater would be the compulsion ofproject sponsors to seek larger grants from the Government. This, in turn, would restrict
the ability of the Government to leverage a larger pool of extra-budgetary resources,
including private investment, and would hence result in a limited programme of highway
development.
In view of the foregoing, it is important to rely on cost-effective designs and tocombine them with a phased investment programme to enable a more efficient andsustainable programme of highway development.
As a general principle, capacity augmentation of highways should be based on thestandards recommended by the Indian Roads Congress for different bands of traffic
volume. The emphasis should be on phased development rather than on providing highcost roads for catering to the projected growth in the long term.
Where traffic intensity is comparatively low, limited widening of highways could beundertaken with further widening planned after 7-12 years depending on projected traffic
growth. Upgradation of designs and standards, construction of bypasses in urban andsemi-urban areas and other improvements may also be planned in phases depending on
traffic intensity. These issues have been subjected to in-depth examination and reflected
in a Manual of Standards and Specifications that forms part of the standard documents
associated with the MCA.
Technical parameters
Technical parameters will focus on the level of service for the users
Unlike the normal practice of focussing on construction specifications, the technicalparameters specified in the MCA are based mainly on output specifications, as thesehave a direct bearing on the level of service for users. Only the core requirements ofdesign, construction, operation and maintenance of the Project Highway are to be
specified, and enough room would be left for the Concessionaire to innovate and add
value.
In sum, the framework focuses on the ‘what’ rather than the ‘how’ in relation to thedelivery of services by the Concessionaire. This would provide the requisite flexibility to
the Concessionaire in evolving and adopting cost-effective designs without compromisingon the quality of service for users. Cost efficiencies would occur because the shift to
output based specifications would provide the private sector with a greater opportunity
to innovate and optimise designs in a way normally denied to it under conventional input
based procurement specifications.
Concession period
Concession period to be linked to projected traffic
The guiding principle for determining project-specific concession period is the
carrying capacity of the respective highway at the end of the concession period. As such,the concession period is determined on a project-specific basis depending on the volume
of present and projected traffic. Toll paying users should not be subjected to congested
highways and the Concession should, therefore, cease when full capacity of the road isreached, unless further augmentation is built into the MCA.

12

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

The time required for construction (about two years) has been included in theconcession period so as to incentivise early completion, implying greater toll revenues.
Selection of Concessionaire 0
Competitive bidding on single parameter will be the norm
Selection of the Concessionaire is based on open competitive bidding. All projectparameters such as the concession period, toll rates, price indexation and technicalparameters are to be clearly stated upfront, and short-listed bidders will be required to
specify only the amount of grant sought by them. The bidder who seeks the lowest grantshould win the contract. In exceptional cases, instead of seeking a grant, a bidder may
offer to share the project revenues with the Government.
Grant
Grants to bridge viability gap
Based on competitive bidding, the Government may provide a capital grant of up toa maximum of 20 per cent of the project cost. This would help in bridging the viability
gap of the PPP projects. Where such assistance is inadequate for making a projectcommercially viable, an additional grant not exceeding 20 per cent of the project costs
may be provided for O&M support during the period following the commissioning of the
Project Highway.
Concession fee
Concession fee should be levied only if revenue streams can sustain it
Concession fee is a fixed sum of Re. 1 per annum for the concession period. Where
bidders do not seek any grant and are instead willing to make a financial offer to theGovernment, they will be free to quote a premium on concession fee in the form of ashare in revenues from user fee. In addition, the revenue share quoted for the initial
year could be increased for each subsequent year by an additional 1 per cent. The
rationale for the above fee structure is that in the initial years, debt service obligations
would entail substantial outflows. Over the years, however, the Concessionaire will havean increasing surplus in its hands on account of the declining debt service on the one
hand and rising revenues on the other. Recognising this cash flow pattern, theconcession fee to be paid by the Concessionaire will be on an ascending revenue share.
Risk allocation
Risk allocation and mitigation is critical to private investment
As an underlying principle, risks have been allocated to the parties that are best
suited to manage them. Project risks have, therefore, been assigned to the private
sector to the extent it is capable of managing them. The transfer of such risks andresponsibilities to the private sector would increase the scope of innovation leading toefficiencies in costs and services.

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 201313

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

The commercial and technical risks relating to construction, operation andmaintenance are being allocated to the Concessionaire, as it is best suited to manage
them. Other commercial risks, such as the rate of growth of traffic, are also being
allocated to the Concessionaire. The traffic risk, however, is significantly mitigated as the
Project Highway is a natural monopoly where existing traffic volumes can be measured
with reasonable accuracy. On the other hand, all direct and indirect political risks arebeing assigned to the Authority.
It is generally recognised that economic growth will have a direct influence on thegrowth of traffic and that the Concessionaire cannot in any manner manage or control
this element. By way of risk mitigation, the MCA provides for extension of the concession
period in the event of a lower than expected growth in traffic. Conversely, the concession
period shall be reduced if the traffic growth exceeds the expected level.
The MCA provides for a target tariff growth and stipulates an increase of upto 20 per
cent in the concession period if the growth rate is lower than projected. For example, ashortfall of 5 per cent in the target traffic after 10 years would lead to extension of theconcession period by 7.5 per cent thereof. On the other hand, an increase of 5 per centin the target traffic would reduce the concession period by 3.75 per cent thereof.
Financial close
Project implementation must commence as per agreed timeframe
The MCA stipulates a time limit of 180 days (extendable up to another 120 days on
payment of a penalty) for achieving financial close, failing which the bid security shall be
forfeited. By prevalent standards, this is a tight schedule, which is achievable only if all
the parameters are well defined and the requisite preparatory work has been
undertaken.
The MCA represents a comprehensive framework necessary for enabling financial
close within the stipulated period. Adherence to such time schedules will usher in asignificant reduction in costs besides ensuring timely provision of the much needed
infrastructure. This approach would also address the typical problem of infrastructure
projects not achieving financial close for long periods.
User fee
A balanced and precise mechanism for determination of user fee has been specified
for the entire concession period since this would be of fundamental importance inestimating the revenue streams of the project and, therefore, its viability. The user fee
shall be based on the rates to be notified by the Government.
The MCA also provides for indexation of the user fee to the extent of 40 per centthereof linked to WPI. Since repayment of debt would be virtually neutral to inflation, thesaid indexation of 40 per cent is considered adequate. A higher level of indexation is notfavoured, as that would require the users to pay more for a declining (more congested)level of service when they should be receiving the benefit of a depreciated fee. A higher
indexation would also add to uncertainties in the financial projections of the project.

14

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Local traffic
Owing to the absence of an alternative road, highways should be open to use by
local residents without any payment of tolls until free service lanes are provided. This
would ensure local support for the project and avoid legal challenges or local opposition
arising out of easement rights.
Frequent users should be entitled to discounted rates, in accordance with the tolling
policy.
Construction
Safety and quality of service must be ensured
Handing over possession of at least 80 per cent of the required land and obtaining ofenvironmental clearances are among the conditions precedent to be satisfied by theGovernment before financial close.
The MCA defines the scope of the project with precision and predictability in order toenable the Concessionaire to determine its costs and obligations. Additional works may
be undertaken within a specified limit, only if the entire cost thereof is borne by theGovernment.
Before commencing the collection of user fee, the Concessionaire will be required tosubject the Project Highway to specified tests for ensuring compliance with thespecifications relating to safety and quality of service for the users.
Operation and maintenance
Maintenance standards will be enforced strictly
Operation and maintenance of the Project Highway is to be governed by strict
standards with a view to ensuring a high level of service for the users, and any violations
thereof would attract stiff penalties. In sum, operational performance would be the mostimportant test of service delivery.
The MCA provides for an elaborate and dynamic mechanism to evaluate and upgrade
safety requirements on a continuing basis. The MCA also provides for traffic regulation,
police assistance, emergency medical services and rescue operations.
Right of substitution
Lenders will have the right of substitution
In the highways sector, project assets may not constitute adequate security for
lenders. It is project revenue streams that constitute the mainstay of their security.
Lenders would, therefore, require assignment and substitution rights so that theconcession can be transferred to another company in the event of failure of theConcessionaire to operate the project successfully. The MCA accordingly provides forsuch substitution rights.

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

15

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Force majeure
Concessionaire will be protected against political actions
The MCA contains the requisite provisions for dealing with force majeure events. In
particular, it affords protection to the Concessionaire against political actions that may
have a material adverse effect on the project.
Termination
Pre-determined termination payments should provide predictability
In the event of termination, the MCA provides for a compulsory buy-out by theGovernment, as neither the Concessionaire nor the lenders can use the highway in any
other manner for recovering their investments.
Termination payments have been quantified precisely. Political force majeure anddefaults by the Government shall qualify for adequate compensatory payments to theConcessionaire and thus guard against any discriminatory or arbitrary action by theGovernment. Further, the project debt would be fully protected by the Government in
the event of termination, except for two situations, namely, (a) when termination occurs
as a result of default by the Concessionaire, 90 per cent of the debt will be protected,
and (b) in the event of non-political force majeure such as Act of God (normally coveredby insurance), 90 per cent of the debt not covered by insurance will be protected.
However, if the Concessionaire fails to commission the project owing to its own default,
no termination payment would be due.
Monitoring and supervision
Independent supervision is essential
Day-to-day interaction between the Government and the Concessionaire has been
kept to the bare minimum by following a ‘hands-off’ approach, and the Government shallbe entitled to intervene only in the event of a material default. Checks and balances
have, however, been provided for ensuring full accountability of the Concessionaire.
Monitoring and supervision of construction, operation and maintenance is to beundertaken through an Independent Engineer (a qualified firm) that will be selected by
the Government through a transparent process. Its independence would provide added
comfort to all stakeholders, besides improving the efficiency of project operations.
The MCA provides for a transparent procedure to ensure selection of well-reputed
statutory auditors, as they would play a critical role in ensuring financial discipline. As asafeguard, the MCA also provides for appointment of additional or concurrent auditors.
To provide enhanced security to the lenders and greater stability to the project
operations, all financial inflows and outflows of the project are to be routed through anescrow account.

16

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 2013

PUBLIC PRIVATE PARTNERSHIP IN NATIONAL HIGHWAYS:INDIAN PERSPECTIVE

Support and guarantees by the Government
Support and guarantees by the Authority are essential
By way of comfort to the lenders, loan assistance from the Government has been
stipulated for supporting debt service obligations in the event of a revenue shortfall
resulting from political force majeure or default by the Government.
Guarantees have also been provided to protect the Concessionaire from constructionof competing roads, which can upset the revenue streams of the project. Additional
tollways would be allowed, but only after a specified period and upon compensation to
the Concessionaire by way of an extended concession period.
MiscellaneousAn effective dispute resolution mechanism is criticalA regular traffic census and annual survey has been stipulated for keeping track oftraffic growth. Sample checks by the Authority have also been provided for. As asafeguard against siphoning of revenue share by the Concessionaire, a floor level ofpresent and projected traffic has also been stipulated.
The MCA also addresses issues relating to dispute resolution, suspension of rights,
change in law, insurance, defects liability, indemnity, redressal of public grievances anddisclosure of project documents.
Conclusion
Private participation should improve efficiencies and reduce costs
The aforesaid contractual framework addresses the issues that are likely to arise infinancing of highway projects on DBFOT basis. The regulatory and policy framework
contained in the MCA is a pre-requisite for attracting private investment with improved
efficiencies and reduced costs, necessary for accelerating

Gajendra Haldea — Discussion Paper 2013-11 — © OECD/ITF 201317

International Transport Forum
2 rue André Pascal
75775 Paris Cedex 16
itf.contact@oecd.org
www.internationaltransportforum.org