FINANCING ROADS IN INDIA : A LENDER‘S PERSPECTIVE

New Delhi, 5 February 2007

Richard Michael
Managing Director,
Infrastructure Finance Unit
•DEPFA BANK
Contents

1. Overview of road project development in India

2. Financing road projects in India
3. Risk analysis and project financing
4. Annuity based versus toll based projects
5. Case studies – Indiana Toll Road and Golden Ears Bridge
6. Questions and contact details

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Road Infrastructure Development

 Out of the extensive road network of 3.3 million kms, National Highways
constitute only 2% of length, but share almost 40% of total traffic
 Ambitious National Highway Development Programme (NHDP) involving
total investment of about USD 50 to 60 billion over the next 5 years
NHDP Phase I & II
 Golden Quadrilateral (GQ) connecting Dehli, Mumbai, Chennai and
Kolkata
GQ near completion
 North-South and East-West Corridors (NS-EW corridors)
NS-EW corridors to be completed by December 2009
 Port connectivity and others

NHDP I & II mostly public funded, not more than 10% via BOT

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Delivery of NHDP I & II

Time overrun
 Golden Quadrilateral was scheduled to be completed in Dec. 2003
 NSEW corridor was scheduled to be completed in Dec. 2007

Causes
 Delays in land acquisition, shifting of utilities, clearance for road over-
bridges and environmental approvals

More private participation

 In order to mobilize private sector funding and to improve contractual
performance, the government has decided to allow more private
participation in NHDP III, IV, V, VI and VII through either BOT-toll or BOT-
annuity.

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Source of Finance for Road Infrastructure Development in India

Sources of funding
 Government funding through a cess on diesel and petrol
 Viability gap funding (up to 20% of capital cost and 20% of O&M)
 Long term external loans from multi-lateral agencies
 Private sector through PPP model
(requires equity from project sponsors and debt financing from local and
international banks arranged in the project finance fashion)

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Risk Identification & Analysis in Road Projects

 Main types of risk :

ƒ Right-of-way
ƒ Construction
ƒ Operation
ƒ Environmental impact
ƒ Traffic
ƒ Tariffs
ƒ Competing roads
ƒ Political
ƒ Interest rates
ƒ Exchange rates
ƒ Inflation
ƒ Force majeure
 Project sponsors/bidders carry out their own investigation (“due diligence”) and
appoint specialist advisors : financial, legal, technical, traffic, insurance.
 Lenders engage independent experts to review the work and conclusions

 Risks allocated to parties in the best position to manage respective risks

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Typical Road Project Structure

Private Sector Public Sector Road users or

Sponsors Concession
public sector
Equity
Agreement
Dividend Toll or Availability Payment

Contract Fee Operator Fee

EPC Project Operator
Contractor Company
EPC Contract O&M Contract

Principal and interest Loan or Credit

Loan Agreement Support Agreement

Commercial Multilateral
Bank Lenders Development Bank

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Risk Through the Life Cycle of a Project

Start of operations /
“ramp-up period”
Project
Risk
“Steady-state”

Time
Construction Phase

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Annuity (Availability) Based versus Tolled Based Road Projects

Availability Based Projects

 Grantor assumes traffic risk
 Project sponsors do not assume traffic risk but obligated to make the
road “available” according to certain specifications. Deductions if
specifications not met.
 Lenders rely on creditworthiness of grantor
Toll Based Projects
 Project sponsors assume traffic risk.
 Require a comprehensive study on traffic forecast.
 Lenders will independently conduct due diligence on traffic forecast
 Lenders prefer non-intervention on tariff as well as inflation indexed
tariff

Nevertheless, lenders should be concerned with project fundamentals

no matter what structure is used.

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Shadow Toll Road

 A unique payment mechanism in toll based project

 “Shadow toll” means road users themselves do NOT pay tolls, but
instead traffic is counted and Government makes a monthly payment
based on a fee per vehicle/km travelled
 Such fees payable may be subject to deduction for poor maintenance
e.g. damaged road pavement, grass cutting, highway lighting, poor
signage, unplanned lane closures for repairs
 Fees are “banded” so that as traffic volume increases marginal revenue
decreases
 Top band pricing is set at 0p so as to cap return to project company –
even though operational costs may continue to increase

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Shadow Toll Road (cont’d)

000s

Traffic 300 Band C

volume (0 p/km)
(vehicle/ 200
km) Band B
(0.15 p/km)
100
Band A
(0.25 p/km)
0
Time

Note : as traffic volume increases the fee paid decreases. Fee for
Band C is set at 0 p/km to protect Government against “super
profits” being made by the project company

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•DEPFA BANK
Framework of NHAI Model Concession Agreement (Lenders’ Perspective)

Model Concession Agreement

 An important government initiative to encourage private participation
 Put forward principles upon which concession agreement should be
drafted
 Transparent selection process – amount of grant
 Government guarantee of state obligations
 Automatic tariff revisions
 Limits on competing routes
 Assistance with land acquisition
 Financial close in 180 days

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•DEPFA BANK
Framework of NHAI Model Concession Agreement (Lenders’ Perspective) (cont’d)

Lenders’ main areas of concern

1. Right of substitution
 Proposed principles : lenders have assignment and substitution rights if
concessionaire fails to operate project successfully
 Lenders’ concern : actual enforcement of substitution rights in
developing countries [prominent example : BTSC, lenders have
difficulties in replacing operator]
2. Force majeure
 Proposed principles : protection for Concessionaire against political
actions that may have a material adverse effect on the project
 Lenders’ view : welcomed such provision

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Framework of NHAI Model Concession Agreement (Lenders’ Perspective) (cont’d)

3. Termination provisions and compensation

 Proposed principles :
ƒ Compulsory buy-out by authority upon termination
ƒ Political force majeure and defaults by authority qualified for
compensation payments
ƒ Full project debt recovery except :
Concessionaire default, 90% debt protected
Non-political force majeure, 90% debt beyond insurance cover will be
protected
 Lenders’ view : termination should not be too easily triggered
4. Others
 International standard documentation; definitions of terms, actual wordings, etc.
 Foreign exchange risk not dealt with if debt finance is raised in foreign currencies

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Cover Ratios

 ADSCR : Annual Debt Service Cover Ratio

= net cashflow available for debt service (i.e. revenue – O&M costs and taxes) in
the next year / debt service falling due within next year
 LLCR : Loan Life Cover Ratio
= NPV of net cashflow available for debt service during the loan period / amount
of loan
 PLCR : Project Life Cover Ratio
= NPV of net cashflow available for debt service during concession period /
amount of loan

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Cover Ratios : comparative examples

BASE CASE RATIOS FOR ADSCR LLCR PLCR

SENIOR DEBT minimum

“Greenfield” toll road project

(full traffic volume and
1.50 2.00 2.50
payment risk)

Shadow toll road (full traffic

volume but NO payment risk)
1.40 1.75 2.00

Annuity (availability) style

road project
1.20 1.35 1.40

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•DEPFA BANK
Cover Ratios : usage

 Periodically, as the project progresses, the forecast data in the model

will be replaced with actual numbers (e.g. construction costs) and
updated economic assumptions (e.g. GDP growth rate, interest rate) and
new cover ratios will be produced.
 These will be compared with the minimum requirements set out in the
Loan Agreement e.g.
> Min. ADSCR covenant : 1.20
> Distribution lock-up: 1.15 (=> no dividends can be paid)
> Event of default : 1.05 (=> banks can enforce security and
“step-in”)

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Recent Road Deals in India

 Tenors typically 13 to 14 years

 Debt / Equity Ratio : 3 / 1

 Pricing in region of PLR (Preferred Lending Rate) minus 2%

 Dominated by SBI (State Bank of India) and other local banks

 USD borrowing now move favourable

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Indiana Toll Road (toll-based)

Project description
 Largest PPP in the USA to date, one of the largest in the world
 Connects Chicago and the west with Ohio and the northeast USA. So
called “main street of the Midwest”, 157 miles long
 Critical transcontinental route that moves freight to and from major US
distribution hubs
 Granting of the concession allows the Indiana Finance Authority to
reduce outstanding debt and invest in new infrastructure
 75-year concession involves the lease, operation and maintenance of the
road and implementation of an electronic tolling system
 Total size of the deal : USD 4.1 billion (DEPFA’s commitment as
mandated lead arranger : USD 580 million)

Toll-based project : Traffic and Revenue Report prepared by Maunsell

Australia

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•DEPFA BANK
Key features of the Concession Agreement (Indiana Toll Road)

 Lessor : The Indiana Finance Authority (IFA)

 Concessionaire : Macquaire and Cinta
 Term : 75 years
 Revenues : Tolls; no approval from IFA is required for implementation
 Lenders’ protection :
ƒ Termination Compensation = the greater of the fair market value of
the Concessionaire’s interest in the toll road and the outstanding
debt
ƒ Lessor and concessionaire cannot amend the agreement without
lenders’ approval if the amendment would materially adversely affect
the lenders
ƒ Lenders’ cure rights for events of default of the Concessionaire

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•DEPFA BANK
Golden Ears Bridge (availability based)

Project description
 The project has, for many years, been part of the long term transportation plans
of the Greater Vancouver Transportation Authority and the Province of British
Columbia
 Development of a new 6-lane bridge over the Fraser River to improve movement
in the greater Vancouver region
 Will provide users with a projected 20min – 30min time saving
 Will provide a vital link between the communities on both sides of the river
 Largest PPP in Canada to date with a total investment value of € 900m
 One of the largest monoline wrapped loan PPP transactions in the world in 2006
(XL Capital and Ambac as wrapper)
 Total size of the deal : CAD 1.1 billion (DEPFA’s commitment as mandated lead
arranger : CAD 560 million)

Availability payment : lessor assumes traffic risk

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Key features of the Concession Agreement (Golden Ears Bridge)

 Lessor : Vancouver Transport Authority (Aa3 rated by Moodys)

 Concessionaire : Golden Crossing Group, 100% owned by Bilfinger
Berger BOT GmbH
 Term : 32 year post-construction
 Revenue : Availability payment from Lessor
 Index-linked (CPI) availability payments :
ƒ Capital payment to cover costs of capex
ƒ Operation and maintenance payment
ƒ Security incentive payment
 Penalty : Concessionaire will be penalized for non-availability and poor
operation and maintenance

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Questions and Contact Details

Richard Michael
Managing Director

Infrastructure Finance Unit

DEPFA Investment Bank Limited

1104-5 ICBC Tower

3 Garden Road

Hong Kong

E-mail: richard.michael@depfa.com Phone: +852 2509 8700

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