A STUDY ON PROJECT FINANCING OF BOT ROAD PROJECTS AT L&T IDPL

Synopsis Masters of Business Administration

In

Finance
By

Naveen Das (10HM19)

HSM DEPARTMENT NATIONAL INSTITUTE OF TECHNOLOGY KARNATAKA SURATHKAL, MANGALORE 575025 JANUARY, 2012

INTRODUCTION
Historically, budgetary resources from the governments have been the major source of financing for infrastructure such as road projects in India. Investments in road sector in the postindependence era have resulted in expansion of the road network from 0.4 million km in 1950 51 to 3.32 million km in 199596. In the corresponding period, kilometers of roads with the proper surface has increased from 0.156 million km to 1.517 million km (Planning Commission 1997). On the other hand, in the period 195051 to 199596 the number of passenger buses has gone up 13-fold from 34,000 to 450,000, while the goods vehicle fleet has increased 22-fold from 82,000 to 1,785,000. In order to keep pace with the growth in traffic, the Central Governments Five Year Plans have emphasized the need for improvement in the road network and the need to overcome inadequacies in the roads. The seventh Five Year Plan (198589) indicated the need for further improvement in the road network as significant portions of the network were without proper surface and pavement width, as most of the roads were single lane (Planning Commission 1980). The report also mentioned that even in the case of National Highways, a significant portion of the roads were single lane. The eighth Five Year Plan (198991) also reiterated the need to overcome the problems of inadequate road pavement; and breadth, thickness, and presence of old, weak, and narrow bridges and culverts (Planning Commission 1992). The severe deficiencies in the road network and the growing mismatch between traffic needs and available infrastructure have resulted in severe capacity constraints, delay, congestion, fuel wastage, and higher vehicle operating costs. The decline in the allocation of funds over various plan periods in terms of percentage of the total plan outlay has been identified as one of the factors partly responsible for the inadequacies in the road network. The lack of investment manifested itself in the form of non-replacement of over aged stock, slowing down of modernization, and inadequate attention to maintenance (Planning Commission 1992). Besides the budgetary constraints, the traditional public procurement system has serious weakness in planning and implementation of road projects leading to time and cost overruns. In order to augment resources, the Indian government has emphasized, starting from the seventh Five Year Plan (198589), the need to look for resources from nonconventional sources of funds and private sector participation in road sector (Planning Commission 1980). The steady economic growth due to economic liberalization in the 1990s has resulted in high traffic growth with the highways becoming increasingly congested, thereby driving up the demand for improved road transport. The upgrade of the Indian road network to world-class standards has assumed immense importance in the post-liberalization era, as the delay on the roads could result in high inventory costs, thus affecting Indias competitiveness in the international market (Planning Commission 1997).

In the post-liberalization era, there has been a paradigm shift in the mode of procurement of infrastructure such as road projects in India. The Central Government and state governments have adopted a public-private partnership (PPP) route in place of a traditional public procurement process for development of limited stretches of the road network. One of the reasons governments are opting to use PPPs for the development of infrastructure is to use the skills, innovations, and managerial capability of the private sector to optimize efficiency in infrastructure projects. PPP arrangements are also employed by governments with the objective of using private financing to address the funding needs, in the light of the competing demands on budgetary resources from social and economic sectors. This project would focus on the various approaches that have been used for financing the National Highways projects through the PPP route in India. The reforms, measures, and procurement strategies that have been initiated to enable financing through the PPP route in view of the risk profile associated with such projects are also discussed.

Q. What is the study about? A. My project deals with the requirement and procurement of funds for the successful
implementation and operation of BOT road projects by L&T IDPL in India

Q. What is the purpose of the study? A. The purpose of my study is to recognize and understand the importance of project financing
in the development of road infrastructure in India.

Q. What is the scope of the study? A. Scope of Project Financing in India will give managers an understanding of the process of
procurement of funds for the purpose of successful implementation and operation of BOT road projects. Scope of Project Financing in L&T Infrastructure Development Projects Limited (IDPL) is to improvise strategies so as to procure finances at lower rates and also to attain the goals of the organization.

Q. What is the significance of the study? A. The significance of the study is to understand the role of Project Financing in BOT road
projects in the development of Indian infrastructure and India as a whole; as a major economic power in the world.

Q. What is the place or area of study? A. The area of study is primarily Ahmedabad (Regional Office) and the areas covered by the
regional office like Vadodara, Baruch, Rajkot etc.

Q. What is the time (approximate) required for the project? A. The study will be conducted over a total time span of four months approximately.

Q. A clear statement of the problem. A. The reduction of the budgetary allocation towards roadway upgrades on account of the
competing demands from other sectors, such as social and economic infrastructure and the limitations in the traditional public procurement system, have resulted in deficiencies in the road network leading to capacity constraints, delay, congestion, fuel wastage, and higher vehicle operating costs. In order to remove the deficiencies and upgrade the road network to world-class standards, the governments at the Union and state levels have initiated various measures. The public-private partnership (PPP) models that have been used in procuring the National Highways projects include Build-Operate-Transfer (BOT) (Toll) and BOT (Annuity) models. This paper focuses on the various approaches that have been used for financing of PPP road projects in India.

Q. Limitations of the study. A. The basic limitations that I face are:

y y y The unavailability to access to certain records and information The inability to get the financiers perspective on project financing Time span of the project

Design of the Study

 Objectives of the study  To understand the importance of project financing in implementation and operation of BOT road projects  To determine the various factors affecting the project financing decision of financers.  To get an insight on the reforms, measures, and procurement strategies that have been initiated to enable financing through PPP route.  To explore the scope of project financing in infrastructure projects in India.

 Basic Assumptions  Public funds are inadequate to meet the investment needs of Indias infrastructure development  The private sector in this study are assumed to be private concession companies

 Approaches used for the study The approaches that I will follow would be descriptive and exploratory. The research begins with a collection of data regarding the topic in the organization and then literature survey for previous researches on the similar topic or subject outside the organization. Then Ill differentiate the data collected and the ones gathered from secondary sources.

 Operational Definition of the variables

 Project Financing has been defined as the financing of an economic unit in which the lender looks initially to the cash flows and earning of that economic unit as the source funds from which a loan will be repaid and to the assets of the economic unit as a collateral for the loan; for the purpose of this study  Public Private Partnership (PPP) means an arrangement between a government/statutory entity/government owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being undertaken by the private sector entity and the private entity receives performance linked payments that conform (or are benchmarked) to specified and predetermined performance standards, measurable by the public entity or its representative.

 Build-Operate-Transfer (BOT) is defined as a form a PPP where in the private partner is responsible to design, build, operate (during contracted period) and transfer back the facility to the public sector. The private sector partner is expected to bring the finance for the project and take the responsibility to construct and maintain it. The public sector will either pay a rent for using the facility or allow it to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is an example.  Concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area.

 Type of sampling to be used Non-probabilistic sampling will be used out of which judgment sampling shall be applied for the purpose of this project.

 What method of data collection would be appropriate? Data collection shall be basically through questionnaires, informal interviews and collection of data from secondary sources.

 How will the data be analyzed? Data will be analyzed using exploratory data analysis and significance tests.

Conclusion
 Likely outcome of the study By the end of the study I should be able to provide a better insight in to the scenario of project financing of BOT road projects in L&T IDPL and in India as a whole.

 Scope for further study With my project covering just the BOT Road Infrastructure and having a limited time period, there is quite a bit of scope for further study in the field and exploring the state of project financing in not only road projects but other infrastructure projects of BOT and other PPP forms as well.

Signature