TERM PAPER

OF

PROJECT MANAGEMENT

TOPIC: NATIONAL HIGHWAY JALANDHAR TO LUDHIANA

SUBMITTED TO: MRS.RICHA SINGH SUBMITTED BY: JASMINE ROLL NO: R1814B28 RES.NO:10800315

National Highway Ludhiana Jalandhar Toll Road Project The board of Asian Development Bank (ADB) was presented a proposal to approve a loan of $ 240 million for National Highway 1 Ludhiana-Jalandhar Toll Road Project. This Project would help address the problem of capacity shortage in the road sector in India and is important from the point of socio-economic development and economic growth of the country. The President was confident that the proposed loan would serve strategy of poverty reduction through infrastructure-led growth. The proposed highway runs through the so called "bread basket" of India. It is part of the historical Grand Trunk road which runs from Sonargaon in Bangladesh to Peshawar in Pakistan. The road was upgraded to four lanes in the past decade and is now being expanded to six lanes due to rapid growth in traffic and increasing congestion. There was little debate on the merits of loan as it satisfied all the existing criteria of ADB. The loan was consistent with ADB's private sector development strategy, country strategy, sector strategy and the long term strategy of infrastructure development through increased private sector participation. The proposed ADB financial assistance would be catalytic, allowing the Project to raise long-term debt financing. Introduction to Indian Roadways Roads are considered to be one of the most cost effective and preferred modes of transportation. Roads are critical for country's overall socio-economic development. An efficient and wellestablished road network is inevitable for promoting trade and commerce as well as meeting the needs of a sound transportation system in the country. Road transport accounts for about 65 per cent of freight (in ton-km) and 86.7 per cent of passenger traffic (in passenger-km) in India. India has one of the largest road networks in the world with a total road length of 3.34 million kilometers. Indian road network consists of expressways, national highways, state highways, district roads and village roads. The number of vehicles has been growing at an average rate of 10.16 per cent per annum over the five years (2003-2008). The share of road in total traffic has grown from 13.8 per cent of freight traffic and 15.4 per cent of passenger traffic in 1950-51 to an estimated 65 per cent of freight traffic and 86.7 per cent of passenger traffic by the end of 200405. This rapid growth in traffic has led to deterioration of road infrastructure, traffic congestion and increase in the cost of transportation. Therefore the road infrastructure needs to be improved for better energy efficiency, lesser pollution and enhanced road safety. The Indian economy has been one of the fastest growing economies in the world. To sustain this growth, there is a need to improve and expand the road infrastructure.

Indian Road Network India has the second largest road network in the world. Indian roads can be broadly classified in four categories as shown in the table below.

1.National 2.State Highways Highways/Expressways 66754 km 128000 km

3.Major and other District Roads 470000 km

4.Rural Roads 2650000 km

India National Highways constitute only about 2 per cent of the road network and it carries 40 per cent of the total road traffic. National Highways further classified depending upon the carriageway width of the Highway. Generally, a lane has a width of 3.75 metres in case of single lane and 3.5 metres per lane in case of multi lane National Highways. The percentage of National Highways in terms of width is as given below.

1. 2. 3.

Single Lane/ Intermediate lane Double lane .Four Lane/Six lane/Eight Lane

18350 km (27%) 39079 km (59%) 9325 km (14%)

The Department of Road Transport and Highways under the Ministry of Shipping, Road Transport and Highways is responsible for construction and maintenance of National Highways .The responsibility for development of other categories of roads rests with the states/Union Territories.

National Highways Authority of India (NHAI) The National Highways Authority of India was constituted by the National Highways Authority of India Act, 1988. NHAI is responsible for the development, maintenance and management of National Highways entrusted to it. NHAI became operational in February, 1995. NHAI is currently managing around 14,162 km of national highways. The first and the foremost task mandated to the NHAI is the implementation of National Highway Development Project (NHDP). Funding of the Projects NHAI projects are funded by following financing mechanisms: 1. Budgetary Allocation: The central government provides funds for developing road projects of National Highways. 2. Central Road Fund: The Central Government has created a dedicated fund called Central Road Fund (CRF) from collection of cess on petrol and high speed diesel oil. Presently, Rs.2 per litre is being collected as cess on petrol and high speed diesel oil. The fund is distributed for development and maintenance of national highways, state roads, rural roads, and for railway over bridges/under bridges and other safety features, as provided in Central Road Fund Act, 2000.

1 2 3 4 5

National Highways Rural Roads Railways Grant to State Governments and UTs for State roads Grant to States & UTs for Roads of Inter-State Connectivity and Economic Importance Total Rs.

Rs. 6541.06 Cr. Rs. 3825.0 Cr. Rs. 724.69 Cr. Rs. 1565.32 Cr. Rs. 173.93 Cr.

12830.00 Cr.

3. Loans: Loan assistance from international funding agencies like Asian Development Bank (ADB), World Bank and Japan Bank of International Co-operation. 4. Market Borrowing: NHAI issues market based securities like bonds.

5. Public Private Participation (PPP): To attract foreign as well domestic investors, some projects are offered on Build Operate and Transfer basis to private agencies. Other forms of PPP model like DBFO and BOT , which are variants of BOT model, are also used for private sector participation. The Project: NH-1 LudhianaJalandhar Toll Road Project The NH-1 LudhianaJalandhar Toll Road Project is the largest among the NHDP phase V projects. The project consists of six-laning of 70 km of the existing four lane NH1 road from Ludhiana to Jalandhar. It is one of the first projects to be based on DBFO pattern. In the traditional BOT model input and output parameters are defined. But in DBFO model, only output parameters are defined. The developer is responsible for the design, engineering, construction, development, finance, operation and maintenance of the road. The project also consists of building flyovers, overpasses and underpasses on all existing intersections to allow continuous flow of traffic. After financial closure the concessionaire will be allowed to collect tolls for 15 years. After that the road will be transferred back to the NHAI. In this project, the revenue sharing model is being used for the first time in a BOT model. In the traditional BOT model, the bid winning criteria is annuity or up-front lump sum payment to NHAI. However, in this project the bid winning criteria is the percentage of revenue the bidder will share with the NHAI. The NH-1 is used by a large number of vehicles owners heading to Delhi, Haryana, Punjab, Himachal Pradesh and Jammu and Kashmir. The Road is also part of ambitious of Natioanal Highways. This road passes through various agricultural and industrial hubs of Northern India like Jalandhar, Phagwara, gorayea and phillor. Structuring the project company The project sponsors created a separate project company Soma Isolux NH One Toll Way Private Limited (termed as Soma Isolux in short) to obtain financing and manage the operations of the project. The Indian sponsor, Soma Enterprise, joined hands with Isolux Corsan group, a Spanish firm, to form the special purpose vehicle. Isolux Corsan Concesiones and CorsanCorviam Construccion are two separate companies of the Isolux Corsan group which have joined the project company as sponsors. The equity ownership of the sponsors comprises of Isolux Corsan Concesiones (51%), Corsan-Corviam Construccion (10%) and Soma Enterprise (39%). Exhibit-3 explains the corporate structure of the project company.

Soma Enterprise Ltd. Soma Enterprise Ltd. is one of the fastest growing infrastructure companies of India. The company has focused its operation on construction and development of core infrastructure projects in the transportation, hydel power and water resource sectors. It has recently diversified into urban infrastructure projects including commercial and residential real estate. Soma recorded a turnover of Rs.17.44 billion in 2007-08 and is currently executing projects worth Rs.110 billion. Soma is actively pursuing 'Public Private Partnerships' mode for construction and operation of infrastructure services in India. Soma, a typical civil engineering and construction firm, plans to branch out into BOT business. This project would give Soma the opportunity to consolidate its position in the infrastructure space in India. Soma is keen to take up large infrastructure projects either on its own or as part of a consortium. Soma has received the ISO 9001 certification for design, planning, construction, and project management for infrastructure and turnkey projects.

Isolux Corsan Isolux Corsan is one of the largest Spanish companies in the sector of engineering,construction, concessions, services and real estate promotions. In addition to its strong presence in Spain, the group has a strong international presence extending to more than 30 countries in five continents. Corsan-Corviam Construccion is the construction arm and Isolux Corsan Concesiones is the concession arm of the company. Isolux Corsan sees India as one of its key future markets and has built up its India office for a long-term position in the market. Isolux Corsan has also formed a long-term joint-venture relationship with Soma, and plans to implement many projects jointly in India. The MadridToledo Toll Highway AP-41 (Spain),MonterreySaltillo Toll Highway (Mexico), A-4 Expressway MadridOcaa (Spain) and PeroteBanderilla Toll Highway (Mexico) are a few of its prominent road projects. Traffic projections The Project, when completed, will relieve congestion in 114 intersections at different points on the road through overpasses and vehicular underpasses. The project will also create two additional lanes which will expand the capacity of the highway. This will result in faster traffic flow and creation of additional traffic. Surveys were conducted to determine the current level of traffic on the highway. Future traffic levels will depend on expected population growth, per capita income growth and the growth of net state domestic products.The various vehicle types having different size and characteristics have been converted into passenger car equivalents. Passenger Car Units corresponding to Vehicle Type

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Car Auto RickshawMini Bus Mini Bus Van/Tempo Standard Bus Agricultural Tractor LCV Agricultural Tractor & Trailer 2 Axle Truck Animal Drawn 3 Axle Truck 13Cycle MAV 15Cycle Rickshaw 16Two Wheeler Others

1.0 1.0 1.5 1.5 1.0 3.0 1.5 1.5 4.5 3.0 6.0 3.0 0.5 4.5 2 0.5 4.5

Revenue Projection The concession agreement provides toll rates to be charged from various users of the project. provides the rate of base fees from the users of national highway upon crossing any of the toll plazas. The amount of fee to be charged for a particular year will be adjusted for inflation. The toll fee has to be revised once a year as follows: Toll fee = Base Fee x (WPI-B / WPI-A) x km for one-way journey Where, WPI-B = Average wholesale price index for the year ending 31 March preceding the fee revision date, WPI-A = Wholesale price index (131.4%) To adjust the toll rate for local traffic, following categories of local traffic have been made: 1. Car, Jeep or Van: There are two subcategories of users: a) Category 1: It includes residents of villages, towns, cities, industrial units, establishments and self- employed persons with workplace located within a radius of 10 km of the fee collection booth. They will be issued a monthly pass for Rs.150. b) Category 2: It includes residents of villages, towns, cities, industrial units, establishments and self- employed persons with workplace located within a radius of more than 10 km but up to 20 km of the fee collection booth. 2. School Bus: A monthly rate of Rs 1,000 will be charged from school buses. 3. Light Commercial Vehicle or Trucks: They will be charged @ Rs 25 per entry for trucks and Rs 15 per entry for LCV for plying within 20 km of the toll plaza. 4. If a vehicle has to cross the stretch of national highway more than once a day, the concession agreement provides that the user will have the option to take a daily pass by paying 1.5 times the corresponding rates computed for a one-way journey. If the vehicle has to use the stretch continuously for the entire month, the user can get a monthly pass upon payment of charges equal to 30 times those applicable for a single trip. The total capital outlay of the project is Capital Outlay year 2009 2010 2011 Capital Outlay (Rs crore) 1650 2500 850

Concession Agreement A concession agreement was signed between Soma Isolux and NHAI on 9 May 2008. It is based upon the standard concession agreement for BOT projects in road sector in India. It is a DBFO model based upon revenue sharing. This is the first time when revenue sharing model is used in India for a road project. The concession period is 15 years starting, 2009. Concessionaire will be collecting the toll for 15 years from the financial closure in 2009 till the end of the concession period, 2023. The concessionaire will also be responsible for operation and maintenance of the road during the concession period. At the end of the period the road will be transferred back to NHAI. The government of India will carry out all preparatory work, including land acquisition, resettlement and compensation, right-of-way The Project already has over 60% ROW available and the rest will be acquired soon. Most of the ROW was acquired before, when the two-lane highway was expanded to a four-lane highway a decade ago. NHAI will procure all applicable permits relating to environment protection and conservation of sites. It will also secure approval from the railway authorities to enable the concessionaire to construct road over bridges and under bridges at grade crossings. The SPV enjoys 100% tax exemption for 5 years and 30% relief for the next 5 years. The concessionaire starts collecting tolls immediately after the appointed date on the existing four-lane toll road while it is constructing the project and will pay concession fee to the government, for retaining all tolls both during and after construction for the duration of the concession period. A number of provisions are made in the concession agreement to facilitate financing (see exhibit 10) and protect the rights of the lenders. Lenders have been given assignment and substitution rights so that the concession can be transferred to another company in the event of failure of the concessionaire to operate the project successfully. The concession agreement says that, upon termination caused by force majeure, 90%100% of outstanding debt will be paid by NHAI; in the event of termination caused by NHAI default, 100% of the outstanding debt will be paid by NHAI; in the event of termination because of concessionaire default, 90% of the outstanding debt will be paid by NHAI during the operating period (but none during the construction period). All financial inflows and outflows of the Project are routed through an escrow account Key features of the concession agreement are: Project Development and Operations The concession agreement says that the commercial operations will start only after Soma Isolux receives the completion or provisional completion certificate from the independent engineer, appointed by NHAI. The independent engineer will monitor the construction and operation of the Project and will submit regular periodic reports (at least once a month) to the NHAI. The NHAI has the right to change the scope of the Project. However, any costs arising from a change in scope order issued during the construction period and in excess of a ceiling of 0.25% of the Total Project Costs, will be reimbursed by the NHAI.

Escrow Account The concessionaire, NHAI, escrow bank and senior lenders will sign an escrow agreement. The escrow account have to be opened by the concessionaire prior to the date of financial close and date the concessionaire takes over the project from NHAI (appointed date). All proceeds of financial package, all toll fees relating to the project highway, all payments by the NHAI, insurance proceeds, will be deposited by the concessionaire in the escrow account. The agreement specifies the following order for appropriation of deposits in the escrow account: 1. All taxes due and payable by the concessionaire 2. All payments relating to construction of the project highway 3. O&M expenses and other costs and expenses incurred by the NHAI and certified by the NHAI as due and payable to it 4. Concession fee due and payable to the NHAI 5. Monthly proportionate provision of debt service due in an accounting year 6. Premium due and payable to the NHAI 7. All payments and damages certified by the NHAI as due and payable to it by the concessionaire, including repayment of revenue shortfall loan 8. Debt service in respect of subordinated debt 9. Any reserve requirements set forth in the financing agreements and balance, if any, in accordance with the instructions of the concessionaire. Since the revenues will come from the first day of the concession period, the escrow agreement requires that all fee and any other revenues from the project highway until commercial operations date be transferred to an escrow sub-account. Up to the COD of the deposits received in the subaccount, the money available to Soma Isolux for use would be subject to the following: 1. Equity of up to 10% of total project costs has been expended by Soma Isolux 2. The disbursement from the sub-account will be the lower of 50% of each debt tranche disbursed by the senior lenders and funds available in the subaccount. 3. If Soma Isolux is in default in meeting a project milestone, then the fee being collected and deposited subsequent to the date of such project milestone, will be held in a separate sub-account (withheld amount account) for each days delay thereafter. 4. If Soma Isolux is in default in meeting the project milestone immediately following the defaulted milestone, the withheld amount available in the escrow sub-account will not be released until the defaulted milestones have been achieved and the project milestone immediately after the latest defaulted milestone, is achieved in time. 5. If Soma Isolux, as certified by the independent engineer to the escrow bank, achieves the defaulted milestone and also achieves the immediately following project milestone on schedule, the withheld amount will be disbursed by the escrow bank to the construction period fee escrow sub-account. 6. If the COD, as certified by the independent engineer to the escrow bank, occurs after the

scheduled six-laning date solely because of concessionaire default, then the withheld amount and the fee deposited (including interest on both) during the period between the scheduled six-laning date and the COD will belong to and be disbursed to the NHAI, and the concessionaire will not be entitled to the same. Equity Dilution The concessionaire cannot undertake any change in ownership without the prior approval of the NHAI. The concession agreement states that the aggregate holding of the existing promoters consortium members will: -Not decline below 51% during the construction period -Not decline below 33% during a period of 3 years following COD -Should be at least 26% or any lower proportion permitted by the NHAI thereafter until the end of the concession period. The concession agreement also states that any transfer of ownership leading to acquisition of more than 15% of total equity of the appointed concessionaire or the company holding directly or through one or more companies the equity of the concessionaire, would require the NHAI approval from the national security perspective. Project Milestones The project has to follow a strict timeline for various milestones to be met. Various milestones are: -Project Milestone I: on the 365th day from the appointed date, concessionaire should have commenced construction of the project highway and expended at least 25% of the total capital cost. -Project Milestone II: on the 730th day from the appointed date, concessionaire should have commenced construction of all bridges and expended at least 65% of the total capital cost. -Scheduled Six-Laning Date: concessionaire should have completed six-laning in accordance with the concession agreement on the 912th day from the appointed date. Refenences -http/www.google.com -http/www.wekipedia.com