Bot

A REPORT

ON

BOT PROJECTS-CONTRACT MANAGEMENT AND ACCOUNTINGBy:

Yukti Bhatia

08BS0003890

RITES LIMITEDCONSULTANTS, ENGINEERS AND PROJECT MANAGERS

RITES BHAWAN NO.1, SECTOR 29,GURGAON 122001A REPORT

ON

BOT PROJECTS-CONTRACT MANAGEMENT AND ACCOUNTING

By:

Yukti Bhatia

08BS0003890

ICFAI Business School

B-101, Phase VIII, Industrial Area

Mohali-160060

Date of Submission: May 19, 2009A REPORT

ON

BOT PROJECTS-CONTRACT MANAGEMENT AND ACCOUNTING

A report submitted in partial fulfillment of

The requirements of MBA Program of

ICFAI Business School

ICFAI Business School, Chandigarh

Submitted To: - Submitted By:-

Project Guide: Yukti Bhatia

Prof. Guriqbal Singh 08BS0003890

IBS Chandigarh

Company Guide:

Mr. Anil Ghai

AGM (Finance & Accounts Dept.) RITES Ltd.

ACKNOWLEDGEMENT

The project, as it stands today is the sincere contributions of spirited individuals. I take this opportunity to express my sincere gratitude to respected Mr. Anil Ghai, AGM (Finance& Accounts Department) RITES Ltd. who agreed to be my mentor.

I am sincerely indebted to him, for his outstanding and undeniable considerations. It was because of him only that I have learnt so much from the company in such short duration. I also thank Mr. Alok Kumar Manager (P&C) for helping me understand intricacies involved in a BOT project. I would also like to utilize the space for thanking all the employees in Finance Division of RITES Ltd. who helped me to understand the working of the department as well as whole organization. Yukti Bhatia

AbstractI joined the Company for the Summer Internship Program in the Finance Department under the guidance of Mr. Anil Ghai, AGM (Finance), RITES Ltd. My Guide has always emphasized on a taking generalized view of all the things happening in project management. I have received continuous learning and a perspective to understand business better.For well over three decades of RITES performance, the service spectrum and work profile has undergone a continuing process of evolution, marked with diversification into the entire transport sector in India and abroad. What the company now intends is to step out of certain traditional concepts as many are necessary and endeavor a bold penetration of new markets and adoption of new technologies, collaborations, concessions and joint ventures.RITES have been handling project management consultancy assignments for the last few decades in railways sector. It has diversified its business into various sectors such as urban transport, infrastructure, leasing, highways, airports etc.

Now rites is trying to leverage upon its expertise in railways sector by entering into BOT projects i.e. build, own and transfer projects related to railways. Bot projects are those which deal with infrastructure projects like development and construction of highways, toll roads etc.

This report deals with understanding RITES Ltd as a company, its core business and its diversified business sectors. The next part deals with understanding of BOT, why BOT projects and what role is RITES playing in various BOT projects.

Table of ContentsSNo.TopicPage No.

1.Acknowledgement i

2.Abstract ii

3.Chapter 1 Introduction

Overview of Company Introduction to BOT

18

4.Chapter 2 Experience of RITES in BOT Projects41

5.Chapter 3 - Project Analysis47

6.Chapter 4 - Conclusion64

7.Chapter5 - Recommendations66

8.Chapter6 - Executive Summary69

9.References71

Introduction

Objectives:To understand the important keys and essential features of project management with special reference to BOT projects and some of the vital activities required to be performed for successful completion of a project, these are given below: Project planning, scheduling and controlling

Quality assurance and inspection

Construction management

International business and projectsScope:Project Title:BOT PROJECTS- CONTRACT MANAGEMENT AND ACCOUNTINGThe project intends to cover the introduction of BOT projects and tries to explain the concession or public private participation concept. The project covers various aspects of a BOT project like its structure, parties involved in it, risks involved in it and risk mitigation, its taxation system and accounting standards involved in it. Further project contains journey of RITES in BOT projects and analysis of one BOT project undertaken by RITES.

Methodology:

Understanding the nature of consultancy industry and the business of the company, the working of the company by going through the company journals, annual reports and other documents.

Discussions with the company mentor and other key persons.

Attending the discussions involved if feasible.

There has been a strong emphasis on learning the practices and procedures involved in general course of business and not specific to RITES Ltd. This has helped me in increasing my spectrum of understanding the overall business.

Limitations of the study:

The companies being a PSU cannot provide entire information as some aspects are kept confidential.

Since they are live projects, some of the documents are in making thus are not available for study.

Since this is a live project, the schedule may vary according to the actual processes being carried-on in the company, i.e. the delay in the process can cause lag in reporting schedule.

CHAPTER-1

INTRODUCTION

Overview of the Company

RITES LIMITED: The OrganizationOriginally incorporated on April 26, 1974, under the Companies Act, 1956 as a private limited company with the name Rail India Technical and Economic Service Private Limited. Subsequently, the word private was deleted from the name of the company on February 17, 1976. Thereafter, the name of the company was changed to its present name RITES Limited on March 28, 2000. The company was converted into a public limited company on February 5, 2008.RITES MISSION STATEMENT

To be one of the most admired companies, in India and Abroad, rendering state-of-the art consultancy, engineering and project management services, in the field of transportation, infrastructure and related technologies.

The company would aim at leadership in every business by synergizing value, integrity, drive for technology and innovative spirits, ensuring value for money to its clients and benefits to society at large.

RITES Ltd. is one of the leading companies in transport infrastructure consultancy, engineering and project management services, with operations in India and abroad. It has the benefit of being associated with the Indian Railways, which is among the largest railway systems in the world under a single management. The company soon transformed itself from a mere railway consultancy firm to the activities connected with other modes of transport, with multidimensional activities. Today RITES Ltd. is a multi-disciplinary organization engaged in various areas related to consultancy at home and abroad ranging from concept to commissioning as well as project management. It gets preference as a consultant for the infrastructure projects of Indian Railways, government agencies and PSUs.Snapshot of the Evolution of RITES

RITES has evolved from being a primarily railway related consultant to a multi-service firm with presence in various infrastructure sectors. The figure below presents a snapshot of the evolution of the firm in this regard.

Range of services

RITES provides a wide range of services to various infrastructure sectors. The following table presents a snapshot of the major sectors in which RITES operates and the key services that it offers. In addition to what is shown below, RITES also exports locomotives and rolling stock and runs concessions in the Railway sector in the international market. It also undertakes third party procurement activities and consultancy services in quality management systems, ropeway projects, IT and financial services for select clients.

Service SectorMaterial InspectionFeasibility Studies,

Detailed Engg,

DPRPMC / Independent EngineerO & MTraining

Indian RailwaysQA DivRI Div, EED, RSD, Arch.RI Div, EEDTraining

Railways InternationalRI Div, EEDRI Div, EEDExpotech / P&CTraining

Highways -DomesticHighwaysHighways

Highways -InternationalHighwaysHighways

Airports - DomesticAirportsAirports

Airports -InternationalAirportsAirports

PortsPortsPorts

InspectionQA Div

Metals & Other IndustriesRI Div, EED, RSDRI Div, EEDO&M

Water & SanitationQA DivUrban Engg.Urban Engg.,

Construction

Projects

Power (Distribution & Transmission)QA DivElectrical Engg.Electrical Engg.

Some interesting facts about the company:

RITES Limited is the first Indian company to operate railways systems abroad on concession basis.

Its services have been instrumental in getting the first ever ISO 9001:2000 certificate in Afghanistan for ARDS.

600 ongoing projects in India and over 30 ongoing projects overseas.

One of the consortiums for the Delhi, Mumbai and Kolkata Metro.

Its clients include various Central and State government ministries, other government bodies, public sector undertakings including IRCON, NALCO, Konkan Railway Corporation Limited, DMRC, IOCL, NTPC Limited, SAIL and NHAI as well as various private companies including Jindal Steel Limited.

As a public sector undertaking, the company has been accorded the Mini Ratna Grade-I status by the Government of India by virtue of operational efficiency and financial status.

RITES Limited was upgraded from Schedule B to Schedule A on July 11, 2007.

Subsidiaries and joint ventures of RITES Ltd:SUBSIDIARY COMPANIES1) M/s RITES (AFRIKA) (Pty) Ltd., Established in Botswana2) M/s Tanzania Railway Limited, Established in Tanzania.

JOINT VENTURES1) M/s RICON - Established in India

2) M/s Ganga Expressway Consultants Private Limited (GECPL), Established in India

3) M/s Companhia Dos Caminhos De Ferro De Beira, SARL, Beria (CCFB) - Established in Mozambique

MANAGEMENT HIERARCHY AT RITES LTD.

RITES Ltd. is one of the leading companies in transport infrastructure consultancy, engineering and project management services, with operations in India and abroad. The company was incorporated by the Ministry of Railways (MoR), Govt. of India (GoI) in 1974 and has the benefit of being associated with the Indian Railways, which is among the largest railway systems in the world under a single management. The company soon transformed itself from a mere railway consultancy firm to the activities connected with other modes of transport, with multidimensional activities. Today RITES Ltd. is a multi-disciplinary organization engaged in various areas related to consultancy at home and abroad ranging from concept to commissioning as well as project management. It gets preference as a consultant for the infrastructure projects of Indian Railways, government agencies and PSUs.

RITES have diversified itself into various range of service sectors which are enlisted in the table given below:

Sectors of Operation RAILWAYS

HIGHWAYS

BRIDGES & TUNNELS

GEOTECHNOLOGY

AIRPORTS

BUILDINGS URBAN TRANSPORT

URBAN DEVELOPMENT

PORTS & WATER RESOURCES

ROPEWAYS

INFORMATION TECHNOLOGY FINANCIAL SERVICES

Rites has some time before only entered into concession projects i.e. public private partnership projects. Though PPP has wide range of projects varying from infrastructure to socio-economic projects but railways being the core area of business of rites so rites has ventured into this field only. The concessions business was started in Fiscal 2000, to capture the emerging business related to transport infrastructure privatization, and currently is in four distinct areas, namely:

Providing full in-house advisory support (including technical and financial due diligence) to the company management while participating as equity partner or consortium or joint venture member to secure infrastructure projects being offered in PPP format.

Carrying out works or services contracts including technical assistance, reconstruction or rehabilitation of infrastructure and leasing of rolling stock secured from concession companies where RITES Ltd. has taken equity either directly or through its subsidiaries or joint ventures.

Providing support to its concession companies in completing pre-takeover activities including arranging of finance, other technical and management support during operation or rehabilitation stage and monitoring performance of concession companies to initiate corrective actions, if required.

Providing advisory services for arranging PPP in infrastructure projects including bid process management, project structuring studies for PPP, services of independent engineer.

Concept of BOT

BOT

BOT stands for build, operate and transfer. Build-Operate-Transfer (BOT) is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facilities stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the project.

Due to the long-term nature of the arrangement, the fees are usually raised during the concession period. The rate of increase is often tied to a combination of internal and external variables, allowing the proponent to reach a satisfactory internal rate of return for its investment.

Examples of countries using BOT are India, Croatia, Japan, China, Malaysia and Philippines. However, in some countries, such as Canada, Australia and New Zealand, the term used is Build-Own-Operate-Transfer (BOOT). Recently, in the United States, BOT strategies are being considered for construction of portions of Interstate 69, with groundbreaking on the Southern Indiana Toll Road segment expected to begin in 2008.

Traditionally, such projects provide for the infrastructure to be transferred to the government at the end of the concession period. (In Australia, primarily for reasons related to the borrowing powers of states, the transfer obligation is omitted). The infrastructure and development projects usually offered for BOT concessions include: power plants; highways, ports and airports; canals, dams, hydropower projects, water supply, and irrigation; telecommunications; railroads and railway transport systems; land reclamation projects, industrial estates or private houses; tourism projects; solid waste management, sewerage, and drainage; markets and slaughterhouses; housing and government buildings; information technology networks and database infrastructures; and education and health facilities.

BOT is a type of project financing. The hallmarks of project financing are:

(i) The lenders to the project look primarily at the earnings of the project as the source from which loan repayments will be made. Their credit assessment is based on the project, not on the credit worthiness of the borrowing entity.

(ii) The security taken by the lenders is largely confined to the project assets. As such, project financing is often referred to as "limited recourse" financing because lenders are given only a limited recourse against the borrower.

Most project finance structures are complex. The risks in the project are spread between the various parties; each risk is usually assumed by the party which can most efficiently and cost-effectively control or handle it.

Once the project's risks are identified, the likelihood of their occurrence assessed and their impact on the project determined, the sponsor must allocate those risks. Briefly, its options are to absorb the risk, lay off the risk with third parties, such as insurers, or allocate the risk among contractors and lenders. The sponsor will be acting, more often than not, on behalf of a sponsor at a time when the equity participants are unknown. Nevertheless, each of the participants in the project must be satisfied with the risk allocation, the creditworthiness of the risk taker and the reward that flows to the party taking the risk. In this respect, each party takes a quasi equity risk in the project.

BOT Stakeholders and Economic Entities of BOT Projects

The idea of the BOT system is simple: a consortium or syndication of private multinational financiers, contractors and advisors joins together to finance, design, construct, and operate a facility such as a power station or a toll road. The engineering, procurement and construction of BOT projects are usually carried out by local and foreign entities. After a set period of time, typically 25 years, the consortium is expected to have recovered the invested capital and earned a fair return, and the BOT assets are handed in a good condition back to the government authority. A BOT scheme usually consists of the following stakeholders (participants), each signs a separate agreement arranged through a designated, experienced project team coordinator:

1. Government (central, state or local) authority or a government-owned enterprise, which offers, accepts and grants the BOT concession and stipulates the various terms; or, alternatively, receives, examines and accepts a proposed concession by project sponsors. Local politicians, civil servants, employees and workers, and the public as users of BOT facilities are also included. The government usually grants the necessary lot of land.

2. Project sponsors, consisting of multinational investors and lenders who provide equity and debt financing to execute BOT projects. They expect to recover their funds and a fair return on their investment during the concession period.

3. Construction companies, consisting of multinational or local entities.

4. Providers of necessary equipment, machinery and other tangible assets.

5. Plant operators.

6. Insurers.

7. Concession agreement, which stipulates, among other terms, the payback period (average 10 to 40 years), whether the concession is a tax-exempt and duties free investment, and condition of ownership-transfer of project (assets) to the government.

Different BOT Arrangements

A number of variations on the Build-Operate-Transfer theme have emerged from the experience of international infrastructure development. These differ mainly in the exact ownership and payment arrangement between the owner and the concessionaire on completion of the construction portion of the contract. The main approaches are summarized below:

Build-Operate-TransferBuild-Own-OperateBuild-Operate-Own-TransferBuild-Lease-Transfer

The contract will specify and upgrade the operation of the enterprise by the concessionaire for a fixed period of time followed by the transfer of all facilities and equipment back to the owner. The concessionaire is essentially buying the basic facility in installments from the owner, with the facility and it's upgrades provided as security over the repayment period. On completion of the contract, ownership reverts to the concessionaire. The concessionaire builds and transfers a facility to the owner but exclusively operates the facility on behalf of the owner by means of a management contract. The concessionaire builds a facility, leases out the operating portion of the contract, and on completion of the contract, returns the facility to the owner.

Why BOT?

In this arrangement the repayment of any loans borrowed to implement the project is generally not guaranteed by the government of the host country but depends on the revenue generated by the project. Unlike the traditional project financing structure in which the owner (Government) guarantees the repayment of borrowed funds in BOT the project company arranges for guarantees to the lenders of the project covering repayment of the borrowed funds. The loans are made against the projects anticipated cash flow. This provides a number of benefits to the host govt. among these benefits is that since direct funds from the public budget are not required the Government will experience reduced pressure of public borrowing. Private sector financing also generally allows for the transfer of the financial, industrial, and other risks to the private sector. Furthermore since the project is built and during the concession period operated by the project company the Government gains the benefit of private sector expertise in operating and managing such projects.

Benefits of the BOT System

Governments of developing countries have resorted to BOT concessions for several reasons, such as: limited economic and revenue resources, government budget deficits, inefficient and costly state-owned enterprises, lack of modern facilities and technological advances, accelerating demand for infrastructure facilities, bureaucracy, unemployment, and liquidity problems.BOT projects provide tremendous benefits to developing economies and their governments, such as:

(1) attracting and enhancing more foreign investors and lenders(2) transfer of modem facilities, technology, and know-how of advanced countries at minimum costs to governments;

(3) minimizing government expenditures, financial burdens, and responsibilities;

(4) meeting the growing needs for the country's infrastructure facilities and development projects at minimum government involvement and costs;

(5) employment opportunities, workers' training programs, and improving standards of living;

(6) replacing the inefficient and failing state-owned enterprises, and eliminating their financial burdens on government budgets;

(7) developing the local and regional markets; and

(8) guaranteeing continuing government dominance and monopoly of the country's strategic projects by eventual transfer of BOT projects in a good condition to government-ownership.

Risks in BOT Schemes

It is important for the concession company and the construction contractor and the operator to identify and appropriately deal with any risk or obligation set out in the concession agreement.

Although the construction contractor and the operator are not parties to the concession agreement, the final form of concession agreement shall reflect the design and construction risks and the operational risks that are accepted by the construction contractor and the operator and will "flow down" or "step down" into the underlying project agreements. In water and sewerage BOT projects, the World Bank identified major key risks. They are classified into the following eight categories, each consisting of sub-risks:

(1) design and development risk (design defects in water or sewerage plant);

(2) construction risk (cost overrun, delay in completion, and failure of plant to meet performance criteria at completion tests);

(3) operating risk (operating cost overrun, failure or delay in obtaining permissions, consents, and approvals, and shortfall in water quality or quantity);

(4) revenue risk (increase in bulk water supply price, change in tariff rates, and water demand);

(5) financial risk (exchange rate, foreign exchange, and interest rate);

(6) force majeure risk (force majeure, legal and regulatory, and political);

(7) insurance risk (uninsured loss or damage to project facilities);

(8) environmental risk (environmental incidents)

In transportation PPPs, broad categories of risks typically addressed in concession arrangements include:

(i) Risks relating to Revenue Generation: The PPPs relating to existing tolled transportation facilities that are leased to private sector participants typically face traffic risk. Accordingly, analysis of historical traffic patterns and projections prepared by traffic consultants are fundamental tasks for private sector participants. Toll setting duty is also granted to private participant/operator by taking into consideration maximum toll parameters and specified indices for toll increases in later years. Revenue sharing with the governmental authority is also a risk factor to be kept into mind.(ii) Risks relating to Operations and Maintenance and Potential for increased Costs: Operating and maintenance risk is a key risk that is generally transferred to the private sector operator. Public authorities have focused heavily on including detailed operating and maintenance standards in PPP concession arrangements to provide assurance to users that high quality service will be provided in exchange for payment of the toll or user fee. If due to traffic congestion or increase in the traffic than estimated then private operator may build extra lanes if it has been granted land by the government rather than building overpasses and flyovers. These kind of operational and maintenance costs have to be borne by private operator. Public authorities typically are permitted to change operating standards to conform to applicable law or other generally prevailing operating standards. The risk of increased costs arising from these types of changes is generally borne by the private operator(iii) Risks relating to Governmental Action and Force Majeure: A private sector operator is not expected to bear the risk of arbitrary or discriminatory governmental action. Conversely, the state or public authority may only be willing to bear these risks with respect to entities over which it can exert control. Adverse governmental actions can include, for example, discriminatory taxes or other charges or revised operating standards imposed in a discriminatory fashion. Failure to permit toll increases in accordance with the norms set forth in the concession contract would be treated as a breach of contract regulated under the default provisions of the contract.(iv)Termination Risk and Counterparty Payment Risk: private operator face the risk of termination of contract during project duration if the services provided by it are not satisfactory or are not in accordance with regulations mentioned in contract. The underlying project agreements will need to allow the concession company to terminate those agreements if the concession agreement is terminated for any reason. Different remedy mechanisms and financial consequences will apply depending on the cause of the termination, such as termination of the concession agreement due to breach by the government entity, or by the concession company (including a breach which arises because of a default by the construction contractor or operator under their respective contracts), termination for breach by some other contracting parties, termination for convenience, etc.(v) Dispute Risk: In major projects involving many parties at various levels, it is important that disputes are managed in a coordinated manner. Disputes at the concession agreement level may be concerned with matters which arise under the underlying project documents (and vice versa). In other words, the risk of dispute between the government entity and the concession company may also result in, or involve, a dispute between the concession company and the construction contractor or the operator (or all four of them).Contractual mechanisms to mitigate risk and enhance credit

The nature of risks in each contract making up the total BOT package will not differ in principle from those encountered in traditional contracts of the same type. However the fact that each such contract is built into a BOT project means that these risks can sometimes take entirely different contours and dimensions. The mere presence of these risks however should not necessarily prohibit the financing of the project on a non-recourse basis. Proper contractual mechanisms and selection of credit enhancement and monitoring methods can combine to ameliorate these risks. The typical risks in a BOT project and possible methods of dealing with them are discussed below:

1. Obligations to co-operate: the co-operation of the host government in a BOT is an essential requirement for its success. These may include provision of land permits and authorizations, the supply of materials and other supportive measures. Any delay or breach of performance will adversely affect the contractors ability to implement the project.

2. Delay of project completion: timely completion of construction is of special significance in BOT projects as the beginning of operation provides the project company with the opportunity to earn revenues to be used for repaying interest, loans and equity.

3. Operation and performance of the project: it is of significance that the BOT project should function parameters be achieved for example: energy and material consumption or quality and quantity of the products. Thus such parameters are increasingly being specified in contracts and safeguarded via agreements on penalties or liquidated damages.

4. Claims for additional payment: there may be instances where performance deviations from the construction contract stem because the project company or the host government desire modifications to the work and project delays occur for such reasons. The contractor in such cases has recourse to claims for additional payment and also has the right to claim for additional time to complete the project. It should be clear that claims for additional payment and additional completion time should be provided for and regulated in the concession agreement and that this is the sole basis for such claims in the construction contract.

5. Increase in construction costs: there is always a risk that construction cost of a project may exceed the estimated cost. Construction cost exceeds the estimates for reasons like inaccurate engineering design, inflation and problems with project start up. This cost overrun risk may result in increased debt service costs during construction, unavailability of sufficient funds to complete construction and even if funded in the inability of the project company to pay increased interest and principal that result from the additional debt required to complete construction.

6. Raw material supply and utilities: the project must be assured of a supply of raw materials and utilities at a cost within the acceptable ranges of financial projections. The formality of the commitments for the supply depends on the availability of the materials in the project area. In addition costs of import or export fees, transportation charges, storage costs, stability of product, monopolies and finance costs are all potential risks in determining whether an adequate supply exists.

7. Technology: project participants cannot ignore new technologies since new technologies can provide significant benefits. Nevertheless without credit enhancement to over the risk that the new technology will not perform will not perform as expected project financing do not often involve new technologies since unproven technologies are not sufficiently predictable and therefore form an unstable basis for a project financing.

8. Market for product or service: a BOT project financing is generally based on long term, take and pay contracts, in which one or more purchasers agree to accept the production of the project at a firm or predictable price.

9. Project failure: one of the key challenges to be met in a BOT project is how to provide adequate security to non-recourse or limited recourse lenders. Such lenders fear that if there are technical or financial difficulties and the project fails there will be no ready market for a partly built toll road or tunnel. The lenders will normally insist that the benefits of the various contracts entered into by the project company e.g.: turnkey construction contract, performance bonds, supplier warranties, insurance proceeds etc. be assigned to a trustee for the benefit of the lenders. In case of financial or technical failure the right of the lenders to take over the project may also be included in the contractual documents.10. Inflation: both lenders and equity investors will normally insist on some mechanism to protect themselves against inflation risk. In a typical BOT project the potential rewards to lenders and equity investors will not be great enough to compensate them for taking inflation risks. Protection against inflation may be provided by price escalation clauses in the off-take agreement or by provisions in the concession agreement allowing the project company to increase tolls.11. Foreign exchange: BOT projects generally sell its output in the local economy and receive its earnings in local currency. Both lenders and equity investors who have invested in foreign currency will want firm assurances that they will be able to recoup their original investment together with dividends in the same or a comparable foreign currency and that they will be able to do at a reasonable exchange rate. The host government must be prepared to provide some mechanism to assure the foreign investors and their government insurance agencies that they will be authorized 12. Insurance: BOT project typically will have casualty insurance covering its plant and equipment, third party liability insurance, workmens compensation insurance and insurance covering other commercially insurable risks.13. Force majeure: force majeure risks are either not insurable at all or not insurable at a reasonable cost. Commercial lenders and export credit agencies will normally be reluctant to assume the force majeure risks in BOT context and will seek to have support provided by one or more of the other parties. Equity investors may assume the force majeure risks for themselves but normally will not be willing to protect the lenders against force majeure. The lenders will normally insist that the host government provide some coverage for uninsurable force majeure events.14. Political and economical environment: both foreign commercial lenders and foreign equity investors in BOT projects will normally seek political risk insurance either from their own export credit agencies or from such sources as the Multilateral Investment Guarantee Agency. Political risk insurance will include coverage for any breach by the host government of specific undertakings provided to the BOT project. The political risks may arise from changes in applicable law, expropriation etc. the creditworthiness of the host country is another major factor in the decision of lenders to finance a BOT project. The more host government support and guarantees are needed to make a project viable the more lenders will be looking to the credit of the host country as well as to the project for eventual repayment.

15. Protection from competition: the revenue generation of a BOT project may be affected by competition from other projects in the same sector. The host government may thus have to provide some assurances as to the competitive environment in which a BOT project will operate. For e.g.: in case of a toll road project for instance the project sponsors would normally want assurances as to any parallel toll or non-toll roads which might be built during the concession period.Globalization of the BOT System and its taxation problems

Build, operate, transfer (BOT) system and its variations are gaining global recognition as finance schemes to design, construct, operate and manage revenue-producing large scale infrastructure projects by private foreign and national investors at no or minor costs to governments. Currently the new BOT sector lacks special legislative Act and regulatory provisions, as well as accounting and auditing standards and taxation rules. In today's global economy, the governments of many countries, especially of emerging economies, have resorted to build-operate-transfer (BOT) or build-own-operate-transfer (BOOT) schemes to promote private, foreign and national investors to finance, design, construct, and operate large-scale infrastructure and development projects. In return, they are granted the right to generate revenues from the facilities for an agreed period of time, the concession period (usually between 10 to 40 years), to recover their invested capital and earn a fair return on investment. At the end of the payback period, the assets of the BOT project are transferred in a good condition to the ownership of the government or local authority which granted the concession.Taxation system for BOT projects

Taxability of profits generated from BOT operations during and after the concession period depends on the tax status of the BOT projects. There are two sources of determining the tax status of BOT projects: the concession agreement and the country's investment laws. If the concession agreement initially stipulated that BOT projects are exempted from income taxes and custom duties, the tax status is applicable under the condition that project sponsors have fulfilled the agreed obligations stipulated in the terms of the concession. Otherwise, BOT projects are subject to taxes similar to other private and public entities in the country. In case tax incentives were not stipulated, tax authorities usually refer to the country's investment laws to judge whether a particular BOT concession is considered an investment company engaged in specific infrastructure or development projects in a particular region of the country. There are two scenarios:

(1) if a BOT project is considered an investment company under the provisions of the investment laws, BOT profits are exempted from taxes and customs duties, only during the concession or a specific tax period, depending on the concession term or investment laws. If the project sponsors continue operating the projects beyond the expiration of the tax-exempt term, all profits are taxable like other commercial, manufacturing and non-investment companies in the country or

(2) if the BOT project is not considered an investment company under the investment laws or project sponsors did not execute the agreed obligations, it is considered a non-investment company and is therefore treated like other business companies in the country, and, accordingly, profits are subject to income taxes. Generally, profits generated from leasing BOT assets to other entities or BOT project sponsors generate revenues from overseas operations. They are all taxable, even if the BOT project is entitled to tax-exempt status. Moreover, at the expiration of the concession, the assets of the BOT project are transferred to the government In this case, no gains or losses are recognized for tax purposes because in substance there is no sale process of assets, as the project sponsors are committed to transfer the assets to the government, which is considered the original owner.

Accounting Standard Guidelines for Concession Agreement

From the above table we can see that there are different types of concession arrangements for private sector participation in the provision of public sector services. In the leasing arrangement the asset ownership remains with the government as against the last category of arrangement where the operator creates his own asset and retains its ownership for indefinite period.

In leasing and service maintenance contract the asset ownership and capital investment is done by Government. Whereas in other arrangement where owner builds, owns and operates asset the ownership and responsibility of capital investment lies in the hands of operator and not government.

The risk of demand after the asset is being put into use is shared between concessionaire and government in case of leasing arrangement and in build, operate and transfer and rehabilitate, operate and transfer arrangements.

The duration of operation in case of leasing arrangement is between 8-20 years, in case of service maintenance contract it is 1-5 years, in case of rehabilitate, operate and transfer arrangement the duration of operation is 25-30 years.

The residual interest of the contract/arrangement in case of leasing, service maintenance contract, rehabilitate, operate and transfer, build, operate and transfer is enjoyed by government. Whereas in the case of build, own and operate kind of arrangement the residual interest is enjoyed by the owner.

Accounting Standard 19 for Leases

Lease payments under an operating lease should be recognized as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the users benefit.

The lessee should make the following disclosure for operating leases:

a) The total of future minimum lease payments under non-cancellable operating leases for each of the following periods:

i. not later than one year

ii. later than one year and not later than five years

iii. later than five years

b) The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date.

c) Lease payments recognized in the statement of profit and loss for the period with separate amounts for minimum lease payments and contingent rents.

d) Sub-lease payments received (or receivable) recognized in the statement of profit and loss for the period.

e) A general description of the lessees significant leasing arrangements including but not limited to the following:

i. the basis on which contingent rent payments are determined.

ii. the existence and terms of renewal or purchase options and escalation clauses.

iii. restrictions imposed by lease arrangements such as those concerning dividends, additional debt, and further leasing.

Accounting Standard 9 for Revenue Recognition

In a transaction or event involving the rendering of services, performance should be measured either under the completed service contract method or under he proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognized when no significant uncertainty as to measurability or collectability exists. These revenues are recognized on the following bases:

i. Interest: on a time proportion basis taking into account the amount outstanding and the rate applicable.

ii. Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

iii. Dividends from investment in shares: when the owners right to receive payment is established.

Accounting Standard 10 on Accounting for Fixed Assets

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:

(i) site preparation

(ii) initial delivery and handling costs

(iii) installation cost, such as special foundations for plant

(iv) professional fees, for example fees of architects and engineers

The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, and changes in duties or similar factors.

Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalized as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalized and is treated as revenue expenditure. If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortized over a period not exceeding 3 to 5 years after the commencement of commercial production.

Self Constructed Fixed Assets

In arriving at the gross book value of self-constructed fixed assets, the same principles apply as those described in above paragraphs. Included in the gross book value are costs of construction that relate directly to the specific asset and cost that are attributable to the construction activity in general and can be allocated to the specific asset. Any internal profits are eliminated in arriving at such costs.

General selection criteria for various kinds of PPP arrangements

Projects on BOOT or BOT Contract Structure:Railways HighwaysPortsTelecommunications

Selection criteria Highest NPV of the fees to be paid by concessionaire

Provided fee is quoted for each year of concession

Highest percentage for sharing revenue with the conceding authority Lowest NPV of user fees over the concession fee

Shortest concession period where user fee is fixed and revenue not to be shared with the conceding authority Highest NPV of the fees to be paid by concessionaire


Highest percentage for sharing revenue with the conceding authority

Highest NPV of the fees to be paid by concessionaire


Highest percentage for sharing revenue with the conceding authority

For BT (build and transfer), BLT (build, lease and transfer) and BOLT (build, own, lease and transfer) contract structure:

SectorIndian Railways (gauge conversion projects)

Norm Lowest NPV of the amortization payments from the conceding authority

Public Private Partnership-Projects (PPP)Private Finance Initiative Public Private Partnership (PPP) projects represent alternative ways of financing and procuring public sector facilities. PPP is becoming one of the popular ways of financing long term projects particularly related to infrastructure sector. The idea of public and private sector partnership originated in the UK PPP projects are now undertaken in many countries, and have been used to provide a wide variety of facilities, ranging from bridges, tunnels and roads to schools, hospitals and even defence facilities. These projects pose a number of legal challenges: to achieve the quality of the asset/facility constructed, to give security for the funders providing the finance and to allocate risk and responsibilities between the participants. Private participation is granted in almost all public projects, such as power generation and distribution, water supply and sewage facilities, railways, highways, ports and airports, bridges and telecommunications among others. BOT projects represent a new sector in the national economies of developing countries, most of which have not promulgated special legislative statutes to regulate the different aspects of BOT concessions or set up special accounting and auditing standards and taxation rules for the new BOT sector.Railways

Indian Railways is the backbone of the socio-economic growth of India. World's fourth largest rail network and the second largest in Asia, Indian Railways has recently attracted immense global attention due to its successful turnaround to profitability. Over past few years Indian Railways has remarkably transformed itself to set a bench mark in the global level.

Increase in income through advertising on all Rajdhanis, with the cost of advertising being around US$ 1.26 million per train.

Introduction of new generation trains that would be fuel-efficient, recyclable and have low-emission to generate certified emission reduction credits.

Construction of a dedicated freight corridor, with an investment of US$ 81.92 million slated for 2008-09 and US$ 614.40 million for 2009-10.

Technological up gradation and modernization for higher operating efficiency

Development of PPP envisaged in new routes, railway stations, logistics parks, cargo aggregation and warehouses etc.

Development of 100 budget hotels with private participation in the vicinity of railway stations.

Installation of Wi-Fi for providing wireless access at 500 stations.

Introduction of marketing rights for advertising on railway tickets and reservation charts.

Development of agri-retail hubs, cold storage houses, multi-purpose warehouses on surplus land with the Railways.

Training of railway managers to meet future challenges, Indian Railways is planning to set an international management institute in New Delhi.

With increasing containerization of cargo, the demand for its movement by rail has grown rapidly. So far, container movement by rail was the monopoly of a public sector entity, CONCOR. The container movement has been thrown open to competition and private sector entities have been made eligible for running container trains.

Highways

With an extensive road network of 3.3 million kilometers, India is the second largest in the world. Indian roads carry about 61% of the freight and 85% of the passenger traffic. All the highways and expressways together constitute about 66,000 kilometers (only 2% of all roads), whereas they carry 40% of the road traffic. To further the existing infrastructure, Indian Government annually spends about Rs.18000 crores (USD 3.704 billion).

Target

Developing 1000 km of expressways

Developing 8,737 km of roads, including 3,846 km of national highways, in the North East

Four-laning 20, 000 km of national highways

Four-laning 6,736 km on North-South and East-West corridors

Six-laning 6,500 km of the Golden Quadrilateral and selected national highways

Widening 20,000 km of national highways to two lanes

Approach

National Highways Authority of India (NHAI) is the apex Government body for implementing the NHDP. All contracts whether for construction or BOT are awarded through competitive bidding

Private sector participation is increasing, and is through construction contracts and Build-Operate-Transfer (BOT) for some stretches based on either the lowest annuity or the lowest lump sum payment from the Government

BOT contracts permit tolling on those stretches of the NHDP

A large component of highways is to be developed through public-private partnerships and several high traffic stretches already awarded to private companies on a BOT basis.

Potential

Road development is recognised as essential to sustain Indias economic growth

The Government is planning to increase spends on road development substantially with funding already in place based on a cess on fuel

A large component of highways is to be developed through public-private partnerships

Several high traffic stretches already awarded to private companies on a BOT basis

Two successful BOT models are already in place the annuity model and the upfront/lumpsum payment model

Investment opportunities exist in a range of projects being tendered by NHAI for implementing the NHDP contracts are for construction or BOT basis depending on the section being tendered.Sectoral Break Up of PPP Projects by Number

Private Investment in InfrastructureSector10th Plan (% of Private Investment)11th Plan (% of Private Investment)

Roads and Bridges9%36%

Railways0%17%

Irrigation0%0%

Water Supply and Sanitation0%3%

Ports35%74%

Airports57%74%

All Infrastructure Sectors17%30%

Examples of Private Sector Participation

Private Sector Participation

A KPMG report titled 'Opportunities in Infrastructure and Resources in India' reveals that investments of the order of US$ 500 billion are expected to take place in the coming years. This development would call for increased resource requirement, consumer responsiveness, and concern for managerial efficiency. The private sector will be largely involved both at construction contracts and (BOT levels). Some major private participation in this initiative includes:

Reliance Energy Three contracts to four-lane 400 kilometers of highway and four-laning of five national highway projects in Tamil Nadu that covers 400 kilometers and at an estimated cost of more than US$ 762.42 million.

L&T inter-state Road Corridor Limited Four-laning of the 76 kilometers highway between Palanpur and Swaroopgunj on the East-West Corridor.

Jaiprakash Associates Ltd (JAL)Implementing the 165 kilometers long Taj Expressway project, which connects Greater Noida to Agra at a cost of US$ 554.93 million.

Lanco Infratech Four-laning of two highways in Karnataka at an estimated cost of US$ 247.41 million.

DS ConstructionDevelopment of 6 lane NH-8 Delhi- Gurgaon expressway and the Gwalior-Jhansi section on NH-75 that includes four-laning at a cost of US$ 159.9 million. Maytas Infra Private Limited and Nagarjuna Construction Company Ltd (Joint Venture)Four-lane the highway from Tindivanam and Pondicherry, at an estimated cost of US$ 70.09 million.

Era Constructions India Limited and Karam Chand Thapar & Bros LimitedConstruction of a section of the Delhi-Haryana Border to Rohtak and four-laning of Gwalior by-pass at a cost of US$ 73.8 million.

Madhucon ProjectsExecuting ongoing BOT projects with four toll-based road projects.

Public Private Partnership

Since January 2006, the Public-Private Partnership Appraisal Committee (PPPAC) has granted approval to a total of 87 projects including 77 highway projects. The PPPAC approves the infrastructure projects worth US$ 5.98 billion on November 2008. This includes 21 highway projects to be taken up under NHDP Phase III and V.

Ports

With 12 major ports and 187 minor ports, 7,517 km long Indian coastline plays a pivotal role in the maritime transport helping in the international trade. Traffic handled at major ports during April 2008 to January 2009 is recorded to be 436686 units. The ports in India offer tremendous scope for international maritime transport both for passenger and cargo handling.Approach

Indian Government plans to bring a new orientation to encourage the private sector to come forward in developing port activities and operations. The goal is planned to be achieved through numerous initiatives and policies. Many international port operators are invited to submit competitive bid for BOT terminals on a revenue share basis, which has attracted foreign players, such as Dubai Ports International (Cochin and Vishakhapatnam), Maersk (JNPT, Mumbai) and P & O Ports, (JNPT, Mumbai and Chennai), and PSA Singapore (Tuticorin). The National Maritime Development Plan (NMDP) has been set up by the Indian government to improve facilities at all the 12 major ports in India. At an investment of about US$ 12.4 billion, by November 2009, many projects are expected to be completed. This includes ambitious projects, such as the first phase of the international container transshipment terminal (ICTT) at Vallarpadam. Kochi port is being developed as a transshipment hub for India.

Structure

Government of India dominated maritime activity in the past. Policy direction is now oriented to encouraging the private sector to take the lead in port development activities and operations

Many Major ports now operate largely as landlord ports - International port operators have been invited to submit competitive bid for BOT terminals on a revenue share basis

Significant investment on BOT basis by foreign players including Maersk (JNPT, Mumbai) and P & O Ports (JNPT, Mumbai and Chennai), Dubai Ports International (Cochin and Vishakhapatnam) and PSA Singapore (Tuticorin)

Minor ports are already being developed by domestic and international private investors: Pipavav Port by Maersk and Mundra Port by Adani Group (with a terminal operated by P & O) TelecomThe past few years have been experiencing a steady growth in the spread and reach of the telecommunication services in India. The year 2007-08 has recorded a remarkable growth in the field of telecommunication. The targeted growth of 250 million for the year 2007 was achieved in the month of October 2007, which in itself was a great achievement. The year recorded the total number of 156.55 millions of telephone connection. The department is eyeing a total number of 500 million new connections by the end of 2010. Telecom market has grown at about 25% per annum over the last 5 years.

Structure

The Department of telecommunication (DoT) has been focusing on all areas in the sector, such as basic telecommunication, mobile telephony, Internet service, broadband connections, and many more. The strong vision and active initiatives of the government is bearing fruits and the policy framework for the coming years is going to provide a better telecommunication infrastructure in the country.

The department has decided to introduce Mobile Number Portability (MNP) in, keeping in view the interest of the consumers at large. These four metros include; Delhi, Mumbai, Chennai, and Kolkata. This will be the initial phase of the programme. This will enable the consumers to retain the same number irrespective the service provider, in the same area.

A regulation has been implemented with a view to regulating the unsolicited calls from the telemarketers. This has put in force the introduction of "National Do Not Call Registry (NDNC) ". The latest TRAI statistic reports a total number of 7.2 million subscribers being registered on the NDNC so far.

The latest and the new being offered by the government are the broad guidelines for the third generation (3G) mobile service and broadband Wireless Access.

India has a Telecom policy that aims to encourage private and foreign investment, such as;

An independent regulator the Telecom Regulatory Authority of India (TRAI)

Revenue-share model for licenses issued by the Government for telecom services in India. Unified access licenses are available for providing telecom services on a pan-India basis

Planned opening up of National Long Distance (NLD), International Long Distance (ILD) and other value added services.

Major players and presence in value chain:

CompanyServicesInvestor

Cellular Basic NLD1 ILD2

1. Bharti TeleventuresAirtel, SingaporeTelecom, Warburg Pincus

2. Reliance InfocommReliance Group

3. Tata IndicomTata Group

4. BSNLGovernment of India

5. Hutchison EssarVodafone,Hutchison Whampoa,Essar Group

6. IDEA CellularAT&T, Birla Group

Note: 1 National Long Distance,

2 International Long Distance

CHAPTER-2EXPERIENCE OF RITES IN BOT PROJECTS

Journey of RITES Ltd in BOT ProjectsRITES is a leading player in the transport and infrastructure consulting, engineering and project management business in India. Set up to provide consultancy to the Railways sector, RITES has expanded its scope of operations to include the entire gamut of transportation infrastructure and related areas- including roads, airports, ports etc.

In the last 35 years, RITES has established its presence in the entire value chain of an engineering project (given below):RITES Presence in the Entire Value Chain

RITES renders technical advisory services for privatization and concessioning of airports, waterways and environmental engineering, ports, railways, urban transport, real estate infrastructure projects to be implemented on BOT basis

SERVICES

Feasibly studies on BOT/ concessioning of transport infrastructure

Preparation of bid documents

Advisory services on private sector participation

Bid process management

Contract management

EXPERIENCE

ABROAD

Colombia, Sri Lanka, Tanzania, Mozambique, Dominican Republic, Zambia - Railway concession projects and technical advisory services

INDIA

Pre-feasibility study & BOT documentation for Hyderabad and Vishakapatnam airports

Long term lease of 4 international airports

BOT documentation and contract management for privatization of waterways and solid waste management

Advisory services on privatization of ports in states of Andhra Pradesh, Karnataka, Orissa

Design of BOT scheme for Indian Railway infrastructure projects

Bid process management and services for Western Railway (Viramgam Mehsana)

Consultancy services including bid documentation evaluation for LRT system in Andhra Pradesh & Pune high capacity mass transit system

Complete documentation for reconstruction of ITPO Hall No.1 on BOT basis

RITES has ventured into BOT/concession/PPP projects since of late now as it is a risky and huge investment requiring long term area of business. The core area of rites business lies in railway sector. RITES has all types of experience and expertise in this sector. RITES is a consultancy firm having core business in railways. RITES undertakes investigations and feasibility studies, integrated design services, institutional management and technical support for new railway projects and rehabilitation and modernization of existing railways systems. With roots in Indian Railways, RITES shares its vast experience and expertise with various developing railways of the world. Various services provided by RITES for railway sector are:

Comprehensive rail transport consultancy

Design for bulk solids and liquids handling

Design/sizing of rolling stock

Solution to special transport problems like over dimensional consignments

Assistance in repairs to rolling stock

Traffic analysis, site selection, pre-feasibility, DPR, detailed engineering & commissioning

Design for track hoppers, decantation systems, conveyors, bagging plants

Design for automatic loaders, pumping stations, storage tanks & pipeline systems

Design of hopper wagons, container flat wagons, high capacity wagons

Design for shunting & flame proof locos

Movement survey for rail and road and obtaining permission for movement

Modifications to wagon design

Problem evaluation & selection of agencies for rolling stock repair

Quality assurance services and testing of rolling stock

Modeling & optimization through finite element method & analysis

Due to all these services and experience RITES gained expertise in railway sector and RITES decided to enter into BOT projects particularly in railways sector so that RITES could leverage upon its expertise by learning and gaining experience in BOT contracts.Experience of RITES in BOT Projects

Rites ltd has successfully completed a large number of assignments for providing advisory services for projects based on PPP (private public participation). Rites Ltd has gained extensive experience in privatization and concessioning in the international and domestic sector.Types of servicesPreparation of documentsBid process managementProof consultancyAdvisory on policy formulationValuation study and work plan

Rites has been engaged in preparing various documents like RQP, RFP and concession agreement

Rites was appointed by Orissa government for preparation of concession agreement for development of minor port at Jatadhar Muhan by POSCO India RITES had been engaged in bid process management for storage and handling facilities on BOO basis under NFP of GOI

Rites is also working on project for selection of Developer-cum-Operator for iron ore terminal by Paradip Port trust. The project has been completed up to the stage of issuing replies on bidder queries. Rites has been engaged by Government of Andhra Pradesh for providing proof consultancy services for privatized four berth terminal of Kakinada port

Rites has been appointed for entire duration of concession of 20 years by Government. Rites is providing advisory services to Sri Lankan Government for privatization of Sri Lankan Railways(SLR)

Scope of services include:

review of existing status of SLR

Evaluation of options for private sector participation (PSP) in SLR

As a part of privatization process rites has undertaken Asset Review and Valuation of Zambia Railways Ltd for the World Bank. Service provided covered review of railways assets including locos, wagons, track and other fixed infrastructure for the purpose of concessioning of the Zambia Railway System.

CHAPTER-3

PROJECT ANALYSIS

Comparison of financial proposals for development and operation of warehouse and transportation facilities under BOO arrangement for Proposal 1 and 2

A Company A awarded the work of Bid Process Management to the RITES for selection of Developer cum Operators (DCOs) for the projects under the national policy for development of warehouse and transportation facilities. The process of selection of DCOs is in two stages namely (i) qualification of applicants based on the technical and financial capabilities and (ii) selection of DCOs based on the proposals (comprising of technical and financial proposals). The applications for qualification for each of the above Proposals were invited through an International invitation. Nine applications were received for Proposal 1 and eight applications for Proposal 2. RITES evaluated these applications based on pre-specified qualification criteria and submitted its report to Company A. The Company approved qualification of applicants for Proposal 1 and Proposal 2. The proposals were invited from qualified applicants. Four proposals each were received for Proposal 1 and Proposal 2. Four proposals each were received for Proposal 1 and Proposal 2. The details of bidders who submitted proposals are as follows:

For Proposal 11.Consortium of led by Client 1

2.Consortium of led by Client 2


4.Consortium of led by Client 4For Proposal 2





On evaluation of technical proposals of above applicants it was found that the consortium led by Client4 had restructured their consortium and does not meet all the qualification requirements. Consortium led by Client2 has also restructured their consortium for Proposal 2. The restructured consortium of Client2 for Proposal 2 met all the qualification requirements. Therefore, technical proposals of consortiums led by Client1, Client2 and Client3 for Proposal 1 and consortiums led by Client1, Client2 and Client 5 for Circuit 2 were evaluated and it was found that the technical proposals of all the applicants were deficient in one or another way. Thus it was recommended that technical proposals of consortiums led by Client1, Client2 and Client4 for Proposal 1 and consortiums led by Client1, Client2 and Client5 for Proposal 2 should be qualified subject to fulfillment of following conditions:

Consortiums confirm that deficiencies as identified would be made good by them in the project to be implemented.

Consortiums submit only such revised documents which get modified due to removal of deficiencies.

Consortiums confirm that the price proposals will remain unaltered and any increase in the cost on account of removal of deficiencies will be absorbed in the estimated costs of the projects as indicated in the financial proposals.

The above recommendations of RITES were accepted by the Company A.

The prices quoted were read out in the opening, the details of which are given in the Table. Details of Unit Rates Quoted by the BiddersProposals / DepotsQuoted Unit Rates by (in Rs. /ton per Year)

Client1Client2Client3Client4

Proposal 1

Site 11000900990

Site 21000300750

Site 31000300750

Site 41000300750

Proposal 2

Site 1150010001200

Site 21160700900

Site 31160700900

Financial Proposal comprises of Financial Plan and Price Proposal. As per methodology given in RFP document, the Financial Plans are to be evaluated first and Price Proposals of only such bidders whose Financial Plans have been considered reasonable are to be evaluated. Accordingly, Financial Plans were evaluated first and it was found that Financial Plans submitted by all the bidders for Proposal 1 and Proposal 2 were deficient on some aspects or the others. Thus, all the bidders for both the circuits were requested to provide clarifications in respect of deficiencies and submit Financial Plans and soft copies of the financial models removing deficiencies subject to condition that the Price Proposals remain unaltered.

METHODOLOGY FOR EVALUATION OF FINANCIAL PROPOSALS

As per RFP document, the evaluation of Financial Proposals is to be done in two stages. In the first stage, the evaluation of Financial Plans is to be done with respect to its reasonableness.

The parameters to be considered for reasonableness of the financial plan are as follows:

1. Project FIRR not less than average cost of lending as envisaged in the financial plan

2. Gearing ratio max. 70:30

3. In principal commitments from FIs / Banks in respect of this project.

Consortium led by Client1

Details of response of Consortium led by CWC in respect of deficiencies in Financial Plan:Sl. No.Deficiency in Financial PlanStatus of Compliance

1.The debt equity ratio is taken as 80:20, which should not be more than 70:30.Now the debt equity ratio is revised as 70:30. Requirement met

2.The provision for full repayment of debt is not made. Only 11 annual installments are provided which should be 12.Payment schedule has been revised. Now the provision for the full repayment of debt is made. Requirement met.

3.Basis for estimation of capital cost and O&M cost has not been provided.Basis for estimation of capital and O&M cost has now been provided. Requirement met.

4.Basis for incurring capital cost over the construction period is not justified like the land cost is equally distributed over the whole construction period while it should be limited to initial period only.It has been clarified that land purchase would be made on such understanding that owner would be paid over the entire construction period. Requirement met.


Details of response of Consortium led by Client 2 in respect of deficiencies in Financial Plan:Sl. No.Deficiency in Financial PlanStatus of Compliance

1.The project IRR has been calculated at PBDIT, which should be calculated at PBDIT less taxes.

Now the project IRR has been calculated at PBDIT less taxes. Requirement met.

2.PBDIT is calculated without considering the insurance cost.Now the insurance cost has been considered for calculating PBDIT. Requirement met.

3.The project IRR is less than the lending rate.Now the lending rate has been revised to 7%, which was 10% earlier. The bidder has indicated that the reduction in lending rate has become possible due to comfort level the bankers have with their capabilities of project execution. A letter from State Bank of India indicating rate of interest of 7% is also submitted which is enclosed as Annexure-1. It is also clarified by the bidder that equipment will be procured through supplier credit for which the rate of interest is much less than the lending rate of the bank for debt. Therefore, overall lending rate in reality will be less than 7%. Lending rate of 7% p.a. is considered feasible in view of the followings: The lending rates have come down and are likely to remain low in view of surplus funds available with banks and FIs.

The lending rate is also dependant upon the credit worthiness of borrower in the perception of lender and for customers with good rating banks would consider lending at less than their bench market rates which is currently around 10%.

Project may need importing of equipment and facilities for which loan in foreign currency may be availed off for which rate is low i.e LIBOR + basis points (based on risk perception of lender).

The financial risks are limited as revenues are guaranteed.

The successful bidder gets money only after the facility is constructed and commissioned by way of storage-cum-handling charges.

The expenditures taken on account of electricity consumption and debagging / bagging cost have not been taken correctly. After correcting the same the Project IRR comes to 7.54%. Thus requirement is met.

The revised financial plan of the consortium led by Adani now meets all the requirements. The project IRR is more than the lending rate (Project IRR is 7.54% and lending rate is 7.0 % p.a.), gearing ratio is 70:30 and in principal commitments from FIs / Banks in respect of this project has been provided. Therefore the financial plan of this consortium is considered acceptable.


Details of response of Consortium led by Client in respect of deficiencies in Financial Plan:Sl. No.Deficiency in Financial PlanStatus of Compliance

1.Basis for estimation of capital cost has not been provided.

Basis for estimation of capital cost has been provided now. Requirement met.

2.Basis for incurring capital cost over the construction period is not provided which is essentially required for calculating interest during construction. (IDC)

Detailed calculation of IDC has been provided now. Requirement met.

3.Income Tax (IT) is calculated without considering the prevailing tax rates.Detailed calculations of Income tax has been provided by considering prevailing Tax rates and policies. Requirement met.

4.The project IRR becomes less than the lending rate when deficiencies indicated above are removed.

Previously IT was calculated on the assumption that there is no carry forward of losses. Now carry forward of losses is claimed which is permissible under prevailing IT act. However, there is still an error in IT calculations as it has been done in accordance with past provisions as applicable to infrastructure facility which does not include project of this type. There are separate provisions for project of this type in IT act. The revision of model with regard to applicable IT provisions shows that the Project IRR 9.2% which is more than the lending rate as mentioned in the Financial Plan. Thus, the requirement is met.

The revised financial plan of the consortium led by Client3 now meets all the requirements. The project IRR is more than the lending rate (Project IRR is 9.2% and lending rate is 9.0 % p.a.), gearing ratio is 70:30 and in principal commitments from FIs / Banks in respect of this project has been provided. Therefore the financial plan of this consortium is considered acceptable.

Evaluation of Price Proposals

As the financial plan of all the three bidders are considered acceptable and therefore the evaluation of price proposals of all the three bidder has been done to arrive at the notional cost to Company A. The details of notional cost to Company A based on price proposals of bidders for Proposal 1 is given below:

Details of Notional Cost to Company A for Proposal 1 in accordance with the Price Proposals of the Bidders: DepotGuaranteedGuaranteedUnit Rate Quoted by(in Rs. per tonne)

Tonnage (1-10 Yr)Tonnage (11-20 Yr)Client1Client2Client3

Site 11500001000001000900990

Site 250000300001000300750

Site 350000300001000300750

Site 450000300001000300750

Notional Cost to Company A for Proposal 1(in Mil. Rs.)1138281009672

As can be seen from the Table the price proposal of Consortium led by Client2 for Proposal 1, results in least notional cost to Company A. Thus, Consortium led by Client2 is the successful bidder for Proposal 1.

EVALUATION OF FINACIAL PROPOSALS FOR PROPOSAL 2

Consortium led by Client 1


1.The debt equity ratio is taken as 80:20, which should not be more than 70:30.

Now the debt equity ratio is revised as 70:30. Requirement met

2.The provision for full repayment of debt is not made. Only 11 annual installments are provided which should be 12.Payment schedule has been revised. Now the provision for the full repayment of debt is made. Requirement met.

3.Basis for estimation of capital cost and O&M cost has not been provided.Basis for estimation of capital and O&M cost has now been provided. Requirement met.

4.Basis for incurring capital cost over the construction period is not justified like the land cost is equally distributed over the whole construction period while it should be limited to initial period only.It has been clarified that land purchase would be made on such understanding that owner would be paid over the entire construction period. Requirement met.




1.The project IRR has been calculated at PBDIT, which should be calculated at PBDIT less taxes.

Now the project IRR has been calculated at PBDIT less taxes. Requirement met.

2.PBDIT is calculated without considering the insurance cost.Now the insurance cost has been considered for calculating PBDIT. Requirement met.

3.The project IRR is less than the lending rate.Now the lending rate has been revised to 7%, which was 10% earlier. The bidder has indicated that the reduction in lending rate has become possible due to comfort level the bankers have with their capabilities of project execution. A letter from State Bank of India indicating rate of interest of 7% is also submitted which is enclosed as Annexure-1. It is also clarified by the bidder that equipment will be procured through supplier credit for which the rate of interest is much less than the lending rate of the bank for debt. Therefore, overall lending rate in reality will be less than 7%. Lending rate of 7% p.a. is considered feasible in view of the followings:

The lending rates have come down and are likely to remain low in view of surplus funds available with banks and FIs.

The lending rate is also dependant upon the credit worthiness of borrower in the perception of lender and for customers with good rating banks would consider lending at less than their bench market rates which is currently around 10%.

Project may need importing of equipment and facilities for which loan in foreign currency may be availed off for which rate is low i.e LIBOR + basis points (based on risk perception of lender).

The financial risks are limited as revenues are guaranteed.

The successful bidder gets money only after the facility is constructed and commissioned by way of storage-cum-handling charges.

The expenditures taken on account of electricity consumption and debagging / bagging cost have not been taken correctly. After correcting the same the Project IRR comes to 7.54%. Thus requirement is met.


Consortium led by Client 5Details of response of Consortium led by Client 5 in respect of deficiencies in Financial Plan:Sl. No.Deficiency in Financial PlanStatus of Compliance

1.Additional volumes beyond guaranteed volumes have been taken while computing revenue income.Now the additional volumes beyond the guaranteed volumes is taken as nil in the revised financial model. Requirement met.

2.Basis for estimation of capital cost has not been provided.

Basis for estimation of capital cost has been provided now. Requirement met.

3.Income Tax (IT) is calculated without considering the prevailing tax rates.Detailed calculations of Income tax has been provided by considering prevailing Tax rates and policies. Requirement met.

4.The project IRR becomes less than the lending rate when deficiencies indicated above are removed.

Previously IT was calculated on the assumption that there is no carry forward of losses. Now carry forward of losses is claimed which is permissible under prevailing IT act. However, there is still an error in IT calculations as it has been done in accordance with past provisions as applicable to infrastructure facility which does not include project of this type. There are separate provisions for project of this type in IT act. The revision of model with regard to applicable IT provisions shows that the Project IRR is more than the lending rate as mentioned in the Financial Plan. Thus, the requirement is met.

The revised financial plan of the consortium led by Client 5 now meets all the requirements. The project IRR is more than the lending rate (Project IRR is 8.8% and lending rate is 8.5 % p.a.), gearing ratio is 70:30 and in principal commitments from FIs / Banks in respect of this project has been provided. Therefore the financial plan of this consortium is considered acceptable.

Evaluation of Price Proposals

As the financial plan of all the three bidders are considered acceptable and therefore the evaluation of price proposals of all the three bidders has been done to arrive at the notional cost to Company A. The details of notional cost to Company A based on price proposals of bidders for Proposal 2 is given in Table below:

Details of Notional Cost to Company A for Proposal 2 in accordance with the Price Proposals of the Bidders:DepotGuaranteedGuaranteedUnit Rate Quoted (in Rs. per tonne)

Tonnage (1-10 Yr)Tonnage (11-20 Yr)Client 1Client 2Client 5

Site 1150000100000206018001990

Site 212340070000020607001045

Site 3467003500020607001045

Notional Cost for Company A in Proposal 2 (in Mil. Rs.)14122810010369

As can be seen from the Table above, the price proposal of Consortium led by Client 2, for Proposal 2 results in least notional cost to Company A. Thus, Consortium led by client 2 is the successful bidder for Proposal 2.

From the analysis of above tables and conditions given in both proposals we can conclude that: Proposal 1 Based on evaluation of Financial Proposals, Consortium led by Client 2 is recommended as Successful Bidder for Proposal 1.Proposal 2Based on evaluation of Financial Proposals, Consortium led by Client 2 is recommended as Successful Bidder for Proposal 2.CHAPTER- 4

CONCLUSION

CONCLUSION

BOT is a form of project financing where a government grants concession for a period of time to a private consortium thereafter referred to as the project company for the development of a project; the project company then builds, operates, and manages the project for a number of years, recoups the construction costs and derives its profit from the proceeds generated by the operation and commercial exploitation of the project. At the end of the concession period the project is transferred to govt. although the general term used for this type of project is build operate transfer other terms used to describe the BOT project are build own operate transfer, build own lease, build own lease transfer, build rent transfer.

BOT projects are making their presence felt in many infrastructure projects in sectors like highways, bridges, railways, airports, power, and telecommunication through Public Private Participation. BOT/PPP projects are long term projects involving many parties and lots of scope. Rites being in its nascent stage can learn a lot and develop its special functional line and team for BOT/PPP projects.

RITES till now has provided advisory services, services for preparation of documents and bid process management and preparation of schemes for carrying out BOT projects. RITES should familiarize itself with PPP projects nuances, methodologies like best practices, contractual and legal regulations and risk management to expand its role in PPP arrangements. RITES has undertaken many projects under concession arrangement in India as well as abroad. RITES can grab many more BOT projects and play a role of special purpose vehicle or concessionaire by entering into railways and highways related BOT projects since these two sectors are rites forte. for this rites should do project planning and project appraisal which include activities like PPP policy development, developing and maintaining up-to-date financial projections for relevant PPP projects/programs, advising on impact of regulations and other factors on PPP structures, establishing feasibility of various PPP modalities, review and quality enhancement of PPP project proposals for the sector from a financial, institutional and risk modeling/analysis perspective.

CHAPTER- 5

RECOMMENDATIONS

RECOMMENDATIONS

RITES is a consultancy firm and its core area of business lies in railways sector and in construction of roads and highways. RITES Ltd has diversified its business into many SBUs and now it extends its services in many fields like transport planning, geo technology, ports and waterways, airports, power, export business and concession business.

Rites is slowly and gradually entering into concession business and undertaking part in BOT projects. BOT projects are long term projects involving many parties and are generally related to infrastructure projects. RITES is playing a small role of consultant in these types of projects because its a new field of business for it and RITES is still learning the wide aspects and scope of concession business. So below are some recommendations that could prove helpful to RITES before it enters into Public Private participation/BOT projects:

There should be proper selection of BOT project. The project should be reviewed in terms of its size, magnitude, and type. RITES should explore more opportunities in areas where they are already working with their clients so that RITES could leverage upon its expertise and experience. Project planning should be done before hand. Formulation of policies and planning to be done in a way so as to take and grab small value projects first and then gradually increase the exposure in big projects. Selection of bidding partner in PPP/ BOT projects should also be done carefully by practicing Due Diligence. In mega projects a lender/ banker should be taken along with the company for timely arrangement and back up of funds as extra care is required for commitment of funds in BOT/PPP projects. RITES should also venture into those PPP/BOT projects where RITES have already established their business network or clients/countries with whom they have business relations. Knowledge management and training requirements of staff at RITES can also be done to train the staff about intricacies

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