ABSTRACT

Infrastructure represents the wheels of economic activity. People demand infrastructure facilities not only for direct utilization but also for raising their productivity. Infrastructure in India is in grim need of being upgraded. Massive investments are being required in near future. However, the government has a responsibility of not only to upgrade the existing facilities but also to develop new ones too. In developing countries where resources with government are fixed, the privatization of infrastructure is the only answer to this problem. India is also going towards the privatization and there is also need for private investments to be made in an extensive way to meet the need of huge investments. BOT or Build, Operate & Transfer concept is utilized by government, which is a public private partnership. The infrastructure projects are large scale and complex type projects. Highways, power plants, ports, railways and other public facilities are examples of the infrastructure projects. The limited budgets with public agencies and the serious needs for such facilities helped in creating a new method for projects delivery. This method is Build-Operate-Transfer (BOT) delivery system. In BOT projects, there are two main participants. The first participant is the host government of the country where the project will be built and the second one is a private sponsor. The private sponsor usually represented by a consortium of investors or private entity and responsible for designing, constructing the facility, maintaining and operating the facility after commissioning for an agreed duration called concession period and arranging for financing these phases of the project life cycle. By the end of the concession period, the ownership of the facility will be transferred to the host government. The concession period is the time when the private sponsor is collecting back its cost and gaining profits from the service that they offer out of the completed project. The growth can be resulted by providing finance, operation, maintenance, construction and other basic requirements. After the completion of the project, the project is transferred to the host government party. The maintenance and the
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construction of BOT model is done with great responsibilities as the wager are high for both the government and the private parties involved in the project. In this type of project Government refers private sector to participate in the project due to the dearth of public funding. The project involves different types of risks during the implementation of the whole projects and to avoid these multiple risk effective management methods and good managerial risk are required. The present study is based on various aspects of development of Road or Highway projects and its privatization concentrating the contractual and financial issues. The most important issue of privately financed Road project are the management of risks. In BOT Infrastructure projects, participants are exposed to various kinds of risks. About 70% of BOT road projects fail due to improper allocation of risks between project participants. During this research author has tried to focus on how risks are allocated, various risk mitigation techniques in concession agreement & effect of various risks on financial analysis of BOT road projects. Three case studies have been considered; two are based on comparative analysis of risk mitigation techniques in BOT toll project & BOT annuity project and third one the realization is based on financial analysis. The ultimate outcome of the present study is in the form of generic models which can be used for the contractual & financial analysis of Road projects on BOT basis.

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TABLE OF CONTENTS
Candidates Declaration Acknowledgements Abstract Table of Contents List of Figures List of Tables List of Abbreviations i ii iii iv viii x xi

Page No.
CHAPTER 1. Introduction 1.1 Introduction 1.2 Need 1.3 Aim OF Present Study 1.4 Research Objective 1.5 Scope 1.6 Methodology 1.7 Literature Review 1.8 Contribution of the Current Study to the Existing Literature 1-4 1 2 2 2 2 3 4

CHAPTER 2. Infrastructure Project: Development Thought BOT Model 2.1 Introduction 2.2 Types of Infrastructure 2.2.1 Economic Infrastructure 2.2.2 Social Infrastructure 2.3 Need of Infrastructure 2.4 Development of Infrastructure 2.4.1 Public Sector Projects 2.4.2 Private Sector Project 2.4.3 Public Private Joint Venture 2.5 Public Private Partnership
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6-26 6 6 6 6 7 7 8 8 8 9

2.5.1 Definition 2.5.2 Types of contracts in PPP 2.5.2.1 Service Contracts 2.5.2.2 Management contracts 2.5.2.3 Lease Contract 2.5.2.4 Concession Contracts 2.5.2.5 Build Operate & Transfer 2.6 Build Operate & Transfer 2.6.1 Definition 2.6.2 Variants of BOT 2.6.3 Stages of BOT 2.6.4 Major participants in BOT projects 2.6.5 Main agreements in BOT projects 2.6.6 Advantages and Disadvantages of BOT projects 2.7 Financing of BOT projects 2.7.1 Project financing 2.7.2 Parties involved in financing 2.7.3 Instruments used in project financing 2.8 Conclusion CHAPTER 3. Public Private Partnership in Indian Road Sector 3.1 Introduction 3.2 Indian Transport Infrastructure 3.3 Public Private Partnership in road infrastructure 3.3.1 The National Highway (Amendment) Act,1995 3.3.2 Incentives announced by Government to private sector 3.4 Types of PPP in road infrastructure 3.4.1 BOT-Toll basis 3.4.2 BOT-Annuity basis 3.4.3 BOT-Special Purpose Vehicle 3.5 Advantages of PPP in road infrastructure 3.6 Conclusion CHAPTER 4. Risk Involved in BOT Model for Road Projects 4.1 Introduction 4.2 Risk identification in BOT for infrastructure projects 4.3 Types of risks 4.4 Allocation of risks 4.5 Risk mitigation 4.6 Risk mitigation techniques 4.6.1 Contractual solution for Project Company 4.6.2 Government support 4.6.3 Insurance 4.6.3.1 Political risk insurance 4.6.3.2 Force majeure risk insurance 4.7 Conclusion
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9 11 11 12 12 12 12 13 13 14 15 17 19 21 21 22 23 25 26 27-31 27 27 28 28 29 29 30 30 30 30 31 32-43 32 32 33 36 37 39 39 40 41 42 43 43

CHAPTER 5.Contractual Analysis of BOT Road project 5.1 Introduction 5.2 Type of agreements 5.3 Project or Concession agreement 5.4 Selection of concessionaire for BOT projects 5.5 Procurement method 5.5.1 Competitive bidding 5.5.1.1 Open Procedure 5.5.1.2 Restrictive Procedure 5.5.2 Direct negotiation 5.5.3 Competitive negotiations 5.6 Procurement Procedures for Road Projects 5.6.1 Single Stages bidding 5.6.1.1 Test of Responsiveness 5.6.1.2 Qualification Stage 5.6.1.3 Financial Proposals 5.6.2 Double Stage Bidding 5.6.2.1 Prequalification stage or RFQ 5.6.2.2 Financial bidding stage/Bidding stage 5.6.3 Evaluation of tenders/bids 5.6.3.1 BOT(Toll Projects) 5.6.3.2 BOT(Annuity Projects) 5.6.4 Award of Contract 5.6.5 Financial Closure by Concessionaire 5.7 Risk Management in Concession Agreement 5.8 Case Study 5.9 Conclusion CHAPTER 6. Financial Analysis of BOT Road Projects 6.1 Introduction 6.2 Financial appraisal techniques 6.2.1 Discounting criteria 6.2.2 Non-discounting criteria 6.3 Financial Analysis Model 6.4 Steps of Financial Analysis Model 6.5 Case Study: 2 Laning Strengthening of NH-77 from km 0.00 to km 89.00(Muzaffarpur - Sonbarsa Section) 6.5.1 Introduction 6.5.2 Overall approach 6.5.3 Financial Analysis of Case Study Project 6.5.4 Assumed Situations for financial analysis 6.5.5 Results of financial modelling of case study 6.6 Conclusion

44-59 44 44 45 46 46 46 47 47 48 48 49 50 50 50 52 52 52 55 55 55 56 56 56 58 58 59 60-78 60 60 61 63 63 63 68 68 68 69 73 76 78 79-81

CHAPTER 7. Conclusion and Recommendations 7.1 Introduction 7.2 Observations 7.3 Outcome of seminar 7.4 Recommendations 7.5 Future scope of work REFRENCES

79 79 80 80 81 82-83 84

LIST OF PAPERS PUBLISHED

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LIST OF FIGURES

Figure No.
Figure 1.1 Figure 2.1 Figure 2.2

Description
Flowchart for Methodology Types of Infrastructure Development Pattern and Cash Flow of Infrastructure Project (Source: JCEM, Feb 08)

Page No.
3 6 8

Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Figure 2.8 Figure 2.9 Figure 2.10 Figure 2.11 Figure 2.12 Figure 3.1

Extent of private sector participation (Source: JCEM, Feb08) Types of contracts in PPP The BOT Concept Analysis of variants of BOT Role of Public Private Partnership in BOT projects BOT project agreement Cash flow over concession period Corporate financing approach Project financing approach Parties involved in project financing Planned investments in India till 2012 (Source: Government of India, appropriate ministries)

9 12 14 15 17 20 22 22 23 24 27

Figure 3.2 Figure 4.1

Transport demand growth in India Steps in Risk management

28 32

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Figure 4.2 Figure 4.3 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 6.1 Figure 6.2 Figure 6.3 Figure 7.4 Figure 7.5

Risk profile in various phases Risk management process Agreements in BOT projects Restricted procedure for BOT procurement Competitive Negotiations for BOT procurement Framework for procurement of concessionaire for BOT Road projects Financial appraisal techniques Cash flow diagrams Financial analysis model for BOT Road projects Sensitivity analysis for IRR Sensitivity analysis for NPV

32 38 44 47 48 57 60 64 67 78 78

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LIST OF TABLES

Table No.
Table 2.1 Table 2.2 Table 2.3 Table 4.1 Table 4.2 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 6.1 Table 6.2 Table 6.3 Table 6.4

Decription
Potential advantages of using PPP Comparative Analysis of Contracts in PPP (Source: World Bank ) Participates & their Primary Goal Country & Project risk Risk allocation between various parties Comparison of various procurement methods Project category in single stage bidding Escalation factor Experience factor in two stage bidding Cost Estimate Traffic Growth Rates (%) Prescribed Toll Rates Revenue collection per annum

Page No.
11 13 19 37 37 49 51 51 55 69-71 72 72 72

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LIST OF ABBREVATIONS

BOT BOOT BOO BRT BOOST BLT BTO PPP GDP

Build Operate Transfer Build Own Operate Transfer Build Own & Operate Build Rent & Transfer Build Own Operate Subsidize & Transfer Build Lease & Transfer Build Transfer & Operate Public Private Partnership Gross Domestic Product

SPV OPIC MIGA

Special Purpose Vehicle Overseas Private Investment Corporation Multilateral Investment Guarantee Agency (World Bank)

PRI

Political Risk Insurance

MCA SERV

Model Concession Agreement Swiss Export Risk Insurance