Finance - 05 Toll Road Financing - 29 Jan 07

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.
Forms of Government Support for Road Concessions

Cross-Border Infrastructure: A Toolkit 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.
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
Grant Supported BOTs

Grant During Construction Extent of funds leveraging 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 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
Lender protection
Cash flow impact from road agencys perspective
Grant amount to be disbursed by road agency within a short span of time, and during actual asset (road) creation

Cross-Border Infrastructure: A Toolkit 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 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 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.
Fixed IRR or Assured Return

Cross-Border Infrastructure: A Toolkit 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
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
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.
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 governments contribution (tax payers), fuel cess, user charges & donors-multilateral interventions.
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.
Second Generation Road Funds

The concept of the second generation road fund and board is that of an autonomous agency
controlling
directed having
the funding of road maintenance,
predominantly by road users,
power to raise revenue and control funding allocations, having a strong incentive to insist on commercially and professionally efficient management.
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.
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.
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.
Toll Roads - Case Study:

Noida Toll Bridge Company Limited (NTBCL)
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.
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.
Project Alignment
Background (continued)
30% of Delhis 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
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.
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),

and
NOIDA IL&FS
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.
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
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
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
Govt. of NCT of Delhi
Support Agreement
Govt. of Uttar Pradesh
NOIDA Indpt. Engineer Indpt. Auditor Concession Agreement NTBCL Loan Agreement Banks/FIs EPC Contract Shareholders Agreement Investors
O&M Contract
Mitsui Marubeni Corp. Japan
Intertoll South Africa
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
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
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.
Concession Agreement - Toll Determination

Cross-Border Infrastructure: A Toolkit 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.
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.
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.
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) 8
2 Wheelers
Cars/3-Wheelers
17
LCVs
35
Buses/Trucks
40 to 75
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. all necessary clearances from the Municipal Corporation of Delhi.
Obtain
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.
O&M Agreement
Cross-Border Infrastructure: A Toolkit 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
Allocation of Risks
Commercial and revenue risks
NTBCL Governments of UP and Delhi EPC contractor O&M contractor
Sovereign and political risks
Time overruns
Operation & maintenance
Natural force majeure
Insurance
Risk Mitigation Framework - 1

Risk
Delay in completion Increase in costs
Mitigation
Robust project scheduling Liquidated damages/Incentives on contractor 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

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 Pre-determined formula for revision in tolls Independent fee review committee Revisions do not require approval of NOIDA/Govt. Insurance policy
Regulatory risk (delay in toll revision) Natural force majuere risks

Risk
Political risks
Mitigation
Concession agreement provides compensation formula for various types of direct and indirect political risks NOIDA to pay lenders dues as well as cumulative equity returns in case of termination due to political risks 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
Competing routes
Inflation
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
Take-Out Financing
Take-out financing facility offered by IDFC and IL&FS in the 5th and 9th years at the following rates : Event End of 5th Year End of 9th Year Amount Rs. 9,500/Rs. 16,500/Yield 13.70% 14.19%
Class-Wise Traffic Performance No. of Vehicles Per Day

Year ended 31 March Cars Two wheelers Commercial vehicles Total traffic Growth rate Projected traffic Average revenue (Rs.) Per vehicle Per day Growth rate 12.85 220,461 11.66 262,495 19% 11.68 449,340 71% 12.92 614,279 37% 13.94 736,722 20% 14.62 879,942 19% 2001* 12,050 4,833 278 17,161 2002 15,318 6,684 632 22,634 32% 97,452 2003 26,645 10,969 860 38,474 70% 103,836 2004 33,483 12,935 1128 47,547 24% 110,274 2005 37,058 14,590 1213 52,860 11% 2006** 42,056 16,828 1299 60,184 14%
* with effect from 7 February 2001 ** April 2005 to December 2005
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 2 (56)
2002 118 65 53 426 62 15 (450)
2003 187 82 105 337 63 15 (311)
2004 259 82 176 346 2 15 (186)
2005 30.9. 2005 317 189 91 51 226 138 374 193 2 1 15 (165) 8 (63) 0 (63)
(56)
(450)
(311)
(186)
(165)

12 /6 /2 00
10 15 20 25 30 35 0 5
Closing Price
40
3/ 6/ 2 00 3 00 3 00 3 3 6/ 2 6/ 2 /2 00 00 4 00 4 00 4 /2 00 3/ 6/ 9/ 6/ 2 6/ 2 6/ 2 12 /6 4 00 5 00 5 00 5 /2 00 5 6/ 9/ 12 /6 3/ 6/ 2 6/ 2 6/ 2
NTBCL Share Price History
Date
6/ 9/ 12 /6
Debt Restructuring
Cross-Border Infrastructure: A Toolkit 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.
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
Learnings
Problem of long-term funding to realize value.
The back-ended revenue profile coupled with high interest rates lead to restructuring of NTBCLs debts.
The concession extension approach assumes that investors are indifferent about the time period over which they earn their return.
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.

Finance - 05 Toll Road Financing - 29 Jan 07

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Cross-Border Infrastructure: A Toolkit

Toll Road Financing

Session on Finance Sidharth Sinha

Forms of Government Support for Road Concessions

Provision of development rights and third-party revenue

Government Support for Road Concessions (continued)

Grant Supported BOTs

Cash flow impact from road agencys perspective

Government Support for Road Concessions (continued)

Government Support for Road Concessions (continued)

Government Support for Road Concessions (continued)

actual traffic on the road;

improve the road condition and usage.

Fixed IRR or Assured Return

Standard problem with rate of return regulation

Least Present Value of Revenue (LPVR) Based Bidding

Ring-fenced government sponsored special purpose entities

Maintenance Road Funds (ADB Report)

Second Generation Road Funds

the funding of road maintenance,

predominantly by road users,

Cross-Border Infrastructure: A Toolkit

Evaluation of Road Funds Road Funds Revisited:

Evaluation of Road Funds (continued)

Evaluation of Road Funds (continued)

Cross-Border Infrastructure: A Toolkit

Toll Roads - Case Study:

Cross-Border Infrastructure: A Toolkit

Formation of Project Company

A steering committee consisting of representatives of

of Uttar Pradesh (GoUP),

of Urban Affairs and Employment, Government of India,

Development Authority (DDA),

Formation of Project Company (continued)

The Project (continued)

Cross-Border Infrastructure: A Toolkit

Govt. of NCT of Delhi

Govt. of Uttar Pradesh

Mitsui Marubeni Corp. Japan

Intertoll South Africa

Apr 1992: Signing of MOU Jun 1993: Appointment of Kampsax

Jan 1996: World Bank review & approval

Nov 1997: Concession agreement signed

Jan 1998: EPC contract awarded to MMC

Concession Agreement - Toll Determination

Assured Returns (continued)

Current Toll Rates (valid till 31 Jan 2007)

Toll Rate (Rs./Trip) 8

Support Agreement (continued)

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

Commercial and revenue risks

NTBCL Governments of UP and Delhi EPC contractor O&M contractor

Sovereign and political risks

Operation & maintenance

Natural force majeure

Risk Mitigation Framework - 1

Risk Mitigation Framework - 2

Regulatory risk (delay in toll revision) Natural force majuere risks

Risk Mitigation Framework - 3

Class-Wise Traffic Performance No. of Vehicles Per Day