Mum-Pune Highway Financing

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A Project Report on Case Study of Mumbai-Pune Expressway And Coimbatore Bypass submitted in partial fulfillment of the requirements of the course Infrastructure Development and Financing to Prof. G. Raghuram by : Harish Diwakar Ramasamy Maharnav Patir L.Sridhar Vinod Kumar R.S on 24 th August 2001 Indian Institute Of Management Ahmedabad

Transcript of Mum-Pune Highway Financing

Page 1: Mum-Pune Highway Financing

A Project Report on

Case Study of Mumbai-Pune Expressway And

Coimbatore Bypass

submitted in partial fulfillment of the requirements of the course

Infrastructure Development and Financing

to

Prof. G. Raghuram

by : Harish Diwakar

Ramasamy Maharnav Patir

L.Sridhar Vinod Kumar R.S

on

24th August 2001

I n d i a n I n s t i t u t e O f M a n a g e m e n t

A h m e d a b a d

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Executive Summary

The case of MSRDC and Coimbatore Bypass shows that the present policy of attracting

private participants has many caveats. Chief among them is the financing schemes of the

projects where the government has gone for a BOT contract and has allowed the private

participant to recover their investment through toll collection. At present toll collection in

India is not a viable proposition due to various socio economic problems. Private

companies are unwilling to invest due to the perceived risk due to problems in estimating

traffic density and willingness to pay. There is also the issue of bundling in making

certain projects financially viable. There is also no clarity as to the sharing of risk in such

projects and as to that is responsible if the project turns out to be financially unviable at a

later stage. There is also the issue of project structuring to reduce the overall risk and

make the project attractive for private investor. This project has looked into the various

alternate financing schemes for road sector projects and has recommended the use of both

BOT and the Central Road Fund in India. The government should go for BOT projects

with private players where the private participants feel the project is financially viable

and their investment could be recovered through tolling. The Central Road Fund should

be used in projects which government feels is important for uniform dispersal of

development but there are no takers from the private sector. Government should not

bundle these projects, which have no takers along with other financially viable projects

and complicate the project structure. The identification of feasible projects should be left

to the private sector rather than government going with a set of projects and asking

private sector to choose one among them. The report also suggests certain procedures

regarding the managing of the central road fund, which could be followed for efficient

utilisation of the fund.

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Introduction................................................................................................................................. 5

Public private partnership in the road sector: .......................................................... 6

Objective of the project:................................................................................................. 8

Mumbai Pune expressway......................................................................................................... 8

Introduction.................................................................................................................................... 8

Feasibility study............................................................................................................................. 9

MSRDC.......................................................................................................................................... 9

Project management consultants............................................................................................... 11

Award of contract ........................................................................................................................ 11

Facilities to contractor................................................................................................................. 11

Financing of the project .............................................................................................................. 12

Organizational structure and operational characteristics of MSRDC ....................................... 12

Coimbatore bypass project ...................................................................................................... 14

Introduction:................................................................................................................................. 14

Issues: ......................................................................................................................................... 16

Learning from the above two cases ................................................................ 17

Issues concerned with toll roads: ...................................................................... 19

Alternatives to toll roads: ........................................................................................... 20

Criteria for selection: .................................................................................................................. 20

Shadow tolling: ............................................................................................................................ 21

Annuity based scheme.............................................................................................................. 22

Road Fund and BOT Scheme ................................................................................................ 23

Quasi public-private enterprise:.............................................................................................. 24

RECOMMENDATIONS ............................................................................................... 24

CENTRAL ROAD FUNDS ....................................................................................................... 25

Managing road fund: .................................................................................................................. 26

Conclusion:............................................................................................................................... 27

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Bibliography ............................................................................................................................. 28

Exhibit 1: Government policy initiatives ...................................................... 31

Exhibit II: Construction details of Mumbai pune expressway 31

Exhibit III: Special features of construction (Mumbai Pune

Expressway)............................................................................................................................ 33

Exhibit IV: Special features of the contract (Mumbai pune

expressway) ............................................................................................................................ 34

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Introduction

The importance of the road sector in India cannot be underestimated. It is one of the key

factors in the economic and social development of the nation. India with 33,00,000 km of

roads has the third largest network of roadways in the world half of which are unsurfaced

roads. As per economist 1% growth in infrastructure leads to an equivalent growth of 1%

in the GDP. We are aiming for a GDP growth rate of 9 % in the future. Hence the

infrastructure sector should also grow at this rate. But the figures have so far been

disappointing. Road transportation in India carries 80% of the passenger traffic and 60%1

of the goods traffic. Due to the cross subsidization in the railway sector (the cost of

subsidy on passenger travel being loaded on the freight transportation), more freight

traffic is being diverted to the road sector. Moreover the state and national and state

highways, which carry 70% of all passenger and freight traffic in India, constitute a mere

1,80,000 km or just 6 percent of this total network and of these the national highways

constitute only 2 per cent but carries 40 per cent of total traffic. 2Moreover the vehicular

traffic in India is growing at a rate of 10% while the road sector in India is growing at

6%. Compounding the problem of under capacity in the physical infrastructure of

transportation has been the perceived inability to finance, manage and create new

infrastructure. The inadequacies and deficiencies in the road sector affect the global

dispersal of development and affect global competitiveness. In light of the growing

evidence of such shortcomings the transportation sector was declared a priority sector for

privatization. This was seen as the best strategy for addressing deficiencies and to:

??Minimize the ever-increasing gap between demand and supply for investment

capital, technological know how and human capital in the infrastructure sector

through private participation.

??Eliminate bureaucratic delays and other administrative bottlenecks so that that the

time frame between conceptualization and completion of a project is reduced.

??Optimal utilization of funds that are available as well as private sector finance

companies and international funding agencies like Asian Development Bank and

International Finance Corporation.

1 National Highway Authority of India Official website. Article http://www.nhai.org/road network-htm

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The road sector was declared an industry in 1994 and it was decided to amend the

National Highway Act. This declaration if of great importance because this now allows

companies to generate revenues through bonds, levy tolls and allow the private sector to

participate in infrastructure construction on a BOT basis. It has also allowed 100 per cent

foreign equity participation and given the rights to the private sector to develop services

and rest areas along the roads. Companies involved in BOT projects can avail of a 100

per cent tax holiday for five years and a 30 per cent tax holiday for another five years.

The financing mechanism will mainly involve enhanced budgetary allocation from the

government (by levying cess on petrol, diesels and through tolls on major trunk roads),

through external funding from ADB, World Bank etc., by setting up its own companies

(as for e.g., MSRDC in Maharashtra) and allowing then to borrow from the market,

through BOT schemes, setting up SPVs (special purpose vehicles) and annuity. The key

government policy initiatives are summarized in Exhibit 1

Public private partnership in the road sector:

The spiraling cost of infrastructure investment is growing beyond government resources.

Hence only a partnership of private and public capital can help bridge the infrastructure

gap, particularly in cash strapped developing countries like India. Public Private

Partnerships (PPPs) are essentially partnerships between public sector organizations and

private sector investors and businesses for the purpose of designing, planning, financing,

constructing and operating infrastructure projects. Here the government stops being the

owner of assets and becomes the procurer of services. A project is typically defined as a

public-private partnership or venture when the private participant takes up two or more

phases of the overall project. These phases may be planning, financing, design,

construction, supervision, maintenance, service or project management. The Government

of India embarked upon an ambitious plan for attracting private sector involvement in the

road sector in 1990. Since independence India relied heavily on the public sector for

2 National Highway Authority of India Official website. Article http://www.nhai.org/road network-htm

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economic development funding its activities with budget allocations through national and

state planning. Public sector companies were owned by the state and national

governments. Thus the new policy to privatize represents a significant departure. The role

of the government is till significant in this regard. Before the reforms took shape the

government was responsible for raising the capital for any infrastructure development.

The management of these companies undertaking the development and operational issues

of the roads were answerable only to the government and all.

At present the structure that currently exist for the road sector development is of public

private partnership where every aspect of the project is equitably divided between the

government and the private company. The salient characteristics of this new structure are

??The companies in this sector are formed and promoted through the initiative of

government.

??The government provides the seed capital and key management personnel are

selected from existing government organizations/ departments.

??Funds are raised through public bond issues, as and when required for specific

projects, which are traded on the stock market. Investments are attracted from

private financial institutions as well as the general public. Governments provide

the necessary guarantees for such bond issues. The public corporation is entrusted

with responsibility for overall management of the projects.

??Most of the functions related to construction, operation and maintenance are

contracted out to large and small companies, which could be from private or

public or even cooperative sector.

??These joint sector companies have some popular support, from consumers as well

as investors. Involvement of people in the public companies can generate

relatively greater accountability towards consumers as well as investors.

??These joint sector companies have relatively more independence, flexibility, and

dynamism than the conventional public sector. They are similar to private sector

companies in their management approach and work in a networked relationship

with other participating companies.

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Objective of the project:

This project mainly aims to study the efforts of the government in resolving long-

standing issues relating to the viability and feasibility of private sector investment in the

road sector through two case studies

??The Mumbai pune expressway in Maharashtra

??The Coimbattore bypass in Tamilnadu

Efforts will be taken to bring in the learnings from these two cases for future reference in

the public and private involvement in road sector financing in India. Also we intend to

analyze the various alternatives that are available for financing road sector development

in India and give recommendation after evaluating all these alternatives.

Mumbai Pune expressway

Introduction The need for the Mumbai-Pune expressway was established by a study conducted by the

ministry of surface transport (MOST) during the seventh five-year plan (1985-90) which

identified this corridor as amongst the three most congested national highway corridors

and proposed it to be developed, as a part of the "National Expressway System".

Accordingly, it was decided to explore the possibility of providing a new expressway

between Pune and Mumbai.The need for constructing the Mumbai Pune express highway

was borne by the fact that Mumbai was commercial capital of India and pune was

developing into a major industrial and commercial center. The vehicular traffic in the

Mumbai thane pune belt was 60755 PCU in the year 1996 and is expected to reach

100000 PCU by the year 2004 requiring a ten-lane corridor between Mumbai and pune.3

This belt also contains 72 per cent of factories, provides 77 per cent of industrial

employment, control 88 per cent of working capital, and yielded 86 per cent of total state

industrial output. More recently this link between Pune and Mumbai has become crucial

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for the development of the computer and information sector that is perceived to be a key

element in facilitating globalization and international business linkages. The distance

between the two cities is some 180 km and it takes about four and a half to five hours to

cover it under good traffic conditions. However due to flooding and landslides in the

Western Ghats the roads get frequently and unpredictably paralyzed by accidents, which

block the narrow and winding curves of the two-lane highway. These increase the

traveling time to somewhere around 10 to 15 hours. At present 400 persons are killed due

to accidents on the existing Mumbai-Pune National Highway each year.4

Feasibility study In 1990, the Government of Maharashtra appointed RITES and Scott Wilson Kirkpatrick

of UK to carry out feasibility studies for the new Expressway to be operated on toll basis.

Important findings of the feasibility study are as given below

??RITES recommended the construction of a dual three-lane expressway taking of

from the NH4 at Kon near Panvel and ending at Dehu Road on the westerly

bypass outside Pune — a total length of 84 km.

??Project cost, as estimated by RITES at 1994 prices, was Rs 11,464 million.

??RITES estimated that the diversion of traffic to the new expressway would be the

order of 40-45 percent of the total corridor traffic.

??The EIRR for the project was 17.81 percent, which is above the planning

commission’s cut-off rate of 12 percent. Hence, the expressway project, as

envisaged by RITES, was economically viable.

??RITES recommended that subsidy might come from income through property

development on the land in the vicinity of the expressway.

MSRDC After the recommendations were accepted; tender documents for the expressway were

prepared and bids invited by the Maharashtra public works department (PWD). Six

corporations purchased the tender documents but only one, the Reliance Corporation,

3The Financial Express Official Website http://www.financialexpress.com/fe/daily/20000730/fec30031.html 4 The Financial Express official website http://www.financialexpress.com/fe/daily/20000730/fec30031.html

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submitted a bid. The Reliance bid was for Rs 3,600 crore, a sum more than twice the

currently anticipated cost of the expressway and the government did not accept it. It is

difficult to pinpoint why the Reliance bid was so high. Factors that could have driven up

the bid price can be speculated. Potential costs for hold-ups to the project by the

environmental lobbies could be one. The unexpected decline in real estate demand

leading to reduction of real estate values throughout the Mumbai-Pune belt, the cost of

raising capital needed to acquire high end construction equipment, non-availability of

government subsidies, the overall size and cost of the project and uncertainty that tolls

would provide sufficient pay back in the stipulated time frame, could be other factors that

deterred private companies. Finally the government entrusted the work of constructing

the road to MSRDC. The MSRDC was set up in Maharashtra to expedite work related to

road sector development in the state on a BOT scheme. After that a committee was set up

to look into the geometric standards and technical provisions to de adopted for the

construction of the highway. The committee finally recommended the construction of a

rigid pavement, which would have an incremental sot of 6% over the flexible pavement

but was more economical. MSRDC started a series of meetings with the concerned

authorities and departments so that work could be completed expeditiously and in time.

Maharashtra State Electricity Board (MSEB) was persuaded to complete the shifting of

the electrical and transmission lines. The revenue department was requested to expedite

the work of land acquisition; forest and other departments were urged to expedite forest

and environment clearances. The project required 646 ha of land for right of way, 455 ha

of land for quarry and dumping area and 1338 ha for real estate development.

Appropriate reservations were also required for real estate land so that the land could

generate surplus revenue. Land acquisition and forest clearance was initiated and

accordingly forest and environment clearances were received in October 1997 and

November 1997, respectively. The choice of concrete technology and the large size of the

project as well as the relatively short time in which the work was to be completed

necessitated the use of highly automated, sophisticated equipment and high quality

construction materials. Modern machinery used in the project includes high capacity cone

crushers, sand-manufacturing machines, computer controlled automated batching plants

and laser guided slipform pavers. This level of quality and speed would be impossible

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without automation. Equipment costing Rs 300 crore was purchased for achieving this

fast track construction.5

Project management consultants It was decided to employ a panel of PMCs to carry out detailed engineering design and

estimate and supervise the construction work. The PMCs were selected on the basis of

marks allotted with weight age of 80 percent on the technical and 20 percent on the

financial offer. A condition was put that a PMC will not be allowed to undertake work of

more than one section. The minimum technical supervisory staff was also insisted upon.

Based on the detailed designs and estimates prepared by the PMCs, MSRDC invited bids

from contractors for the construction of the expressway.

Award of contract The PMCs evaluated the bids from the contractors and an exhaustive technical evaluation

was carried out. Marks were distributed on various aspects like for example, experience

on similar works; record of early completions/delays; availability of machinery and

qualified personnel; quality of works executed; proposed work plan, etc. Bids were

ranked by assigning 25 percent weightage to technical scores and 75 percent weightage to

the financial bid. Work orders to the contractors were issued in January 1998. The work

of tunneling was awarded to Konkan Railway Corporation Ltd, on a turnkey and cost

plus basis.

Facilities to contractor MSRDC provided a number of facilities to contractors such as providing land for labour

camps, quarries, electric supply for construction activities; locating petrol pumps adjacent

to the alignment; removal/diversion of utility services such as telephone/water/sewer

lines coming on the alignment; obtaining permission for tree cutting; ensuring availability

of survey/laboratory equipment at site; and ensuring requisite site communication

facilities. A number of facilities were also given to PMCs. The different sections of the

Mumbai pune express highway and their respective consultants and their contractors are

shown in Exhibit 2. The special features of construction are given in Exhibit 3 and the

special features of the contract are shown in Exhibit 4

5 Online Article http://www.epw.org.in/36-7/sa1a.htm

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Financing of the project In October 1997, preliminary estimate of the project was prepared. It was assessed that

the total cost of the expressway would be about Rs 1630 crore. Almost all tenders were

received within the estimated cost (Rs 1488 crores)6. As this is a BOT project, cost of

land acquisition and shifting of certain utilities was borne directly by the government.

In order to subsidize the project, the government has given 1,030 hectares of land, which

is to be used to generate surplus income and make the project financially viable. The cost

of the work is to be recovered from the toll being levied on vehicles using the road. A

request was made to the government to give guarantee for the finances to be obtained

from financial institutions. This was essential since MSRDC is a newly formed company

with an equity output of only Rs 5 crore. It was therefore thought that with government

guarantee and project strength, MSRDC would be in a position to get funds from

financial institutions through private placement financing. Through private placements,

Rs 2120.81 crores was obtained which was also meant for the flyover projects in

Mumbai.

Organizational structure and operational characteristics of MSRDC The organisational structure and management strategy of MSRDC appears to be like

modern autonomous business corporations. There was a dynamic approach to collection,

transmission and free flow of information within the organization. Many activities of a

project were carried out simultaneously as for example the land survey was concurrently

taken up with the task of selecting PMCs so that as soon as the PMCs were selected the,

the survey data could be provided to them. Similarly, each PMC and contractor could

plan the construction of various sections of the expressway independently, in

coordination with other agencies, as well as keeping with the overall framework. There

was parallel information processing, networking and decentralized decision-making

strategies and transparency established. All units involved in the project such as the

6 Maharashtra state road development corporation http://www.msrdc.org/projects/mumbai_pune.html

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PMCs, contractor’s site and main offices and MSRDC offices were connected with a

networked computerized system so that problems could be tracked easily and decisions

could be taken immediately and that decision is reflected everywhere. Inter-related

processes such as material inventory, ordering, store control, manpower and machinery

requirements, measurement and certification of completed work, accounting, billing and

cash flow management are linked in this network. Any information regarding delays,

shortages of material, manpower or resources can be tracked continuously and corrective

measures can be taken immediately. There was a well-defined criterion for selecting

PMCs and contractors and it maintained a customer-service provide relationship with the

PMCS. While it had the right to choose the PMCs and contractors depending upon the

organisational structure, price and service provided it was also answerable to the public

for the efficient and early completion of the project, as it had raised money through

bonds. MSRDC is also looking at various other alternatives for financing the project.

Some of these are: (a) tapping the benefit from the real estate development along the

transport corridor (b) Imposing tax on petrol and diesel fuel to raise needed capital. (c)

Raising a cess on the wage bill of corporations in the beneficiary zone. MSRDC is also

looking at laying telecommunications ducts along various roads and bridges including the

expressway, which can be rented out to private telecommunications agency.

Critical review of Mumbai pune expressway:

The Mumbai pune express highway is considered to be a success story and hence other

state governments are closely watching the activities of MSRDC. It is considered to be

the finest example of public private partnership in road sector development. But the very

aim of attracting aim of involving a full private participant failed in these case as not even

a single international infrastructure company bid for the project and only one Indian

company, reliance, bid for the project inspite of many incentives provided by the

government like the guaranteed 20% return on investment, a promise of rapid and single

window approval, tax incentives and reduced duties on imported equipment for all

investments in industry, and, allowing up to 40 per cent government support to the

project, not a single international infrastructure company bid for the project. Private

sector entrepreneurs are allowed to recover their investments first, followed by the

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government. The government finally did not accept any of the competitive bids and the

responsibility for constructing the road and its subsequent management was entrusted to

the MSRDC 1997. A number of reasons may be cited for the failure to attract private

participants. Foremost among them is the uncertainty related with toll-based system

where the developers are themselves responsible for recovering their investment. Private

participants are unsure as to if they would be able to recover their investment due to

uncertainty in traffic density and attendant risk. And also due to the fluctuations in real

estate cost the valuation of subsidy through free allotment of land by the government is

difficult. The later part of this paper would try to look at various alternatives to BOT

scheme, which may help in attracting more private participants to road sector

development.

Coimbatore bypass project

Introduction: Coimbatore is a prosperous and industrial city of Tamil Nadu, is well connected by

National and State highways. The National Highway No.47 connecting Salem with

Kanyakumari via Trissur, Ernakulam, and Thiruvananthapuram in Kerala, passes through

the city. Congestion within the city was causing traffic delays and so there was a need for

a bypass. The alignment traversing a length of 27.67 kms was finalized and land for a

width of 40-45 m was acquired for this purpose in 1974. However construction was

delayed due to lack of funds.

Later in September 1995 the Ministry of Surface Transport in its initiative to foster

private participation in road infrastructure floated a global tender to select a private party

for development of this project on BOT basis. L&T Transport Infrastructure was the only

party, which responded to the tender and submitted a bid. But the L&T ‘s bid was a

conditional one, which was based on the addition of a bridge over the Attupalam Bridge

on NH47 with in the City outskirts and a ROB on NH-209. These according to L&T were

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included to improve the financial viability of the project. The bid was discussed in detail

with the State Government by the MoST and finally the bridge across Noyal River was

also included in the project. It is important to note here that the GoTN was involved only

in the finalization of bid.

The cost of the project including the bridge was estimated to be Rs.90 crores. L&T

Transportation Infrastructure Ltd was given a concession period of 21 years for the

bridge and 32 years in the case of the bypass to collect toll. The following Toll structure

was fixed initially in the concession agreement.

Category of

Vehicle

Toll on the bridge

for Old and New

Toll on bypass for

part use Rs/trip

Toll on bypass for

full use Rs/trip

Car/Van/Jeep

5.00 7.00 19.00

LCV

15.00 10.00 28.00

Bus/Truck

15.00 20.00 56.00

MAV/Heavy Trucks

23.00 30.00 84.00

Auto rickshaws. Two wheelers and slow moving vehicles were exempt from paying tolls.

The work on the project was commenced on December 1997 and Attupalam Bridge was

opened for transport in December 1998 and the bypass was opened to traffic on 2000.

L&T started collecting tolls from the day of commissioning (tolls were collected both on

the new as well as old bridge) but faced resistance to payment from public, mainly on the

bridge. The state transport corporations together with the local truck and taxi owners have

expressed their unwillingness to pay toll on the bridge. They were demanding concession

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rates for frequent users and opposing the tolling of old bridge. However the compliance

on the bypass was better. L&T made several representations to the government regarding

their loss due to poor compliance. The state government in an attempt to resolve this

issue proposed introduction of concessional rates Rs.50 per day for government and

private buses and Rs.300 per month for all non-commercial vehicles in January 1999.

However, the suggestions were not accepted by L&T and it insisted on retaining the old

rates as agreed in the original agreement. But agreed to the subsidized toll rate of Rs 50

per day per bus of TN Transport Corporation irrespective of the number of trips the buses

will do provided the state government compensated the revenue losses sustained by the

company. The company is said to have made a loss of 20000 Rs per day on government

buses alone during 1999. Financial institutions which had lent 60 crore to L&T started

putting pressure on L&T and its financial losses turned out to be 9 crores per year

including interest charges7. L&T expressed its inability to enforce toll collection and on

request the State police was deployed. This didn’t improve the toll collection in any

significant way and L&T reported a loss of Rs.7.4 crores in June 2000 and requested for

compensation. But GoTN was of the opinion that the loss could have been contained to

Rs.55 lakhs, if L&T had agreed to the concessional rates suggested by them.

L&T tried to enforce toll collection further with the help of police but this resulted in the

whole issue being politicized. Local political parties with vested interested organized a

city wide making the issue more complex.

Issues: Public consultation: No studies for demand or willingness to pay was carried out before deciding to include

the bridge also in the project. Nor were there any public consultation or discussion with

opinion makers were carried out.

Delays due to toll collection:

7 The Financial Express official website Online Article: http://www.financialexpress.com/fe/daily/19991020/fco20046.html

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The tolling has increased traffic delays and public look upon this as a hindrance rather

than any improvement of service.

Local Traffic:

Since the bridge is within the city limits there is huge local traffic and therefore repeat

trips are high. This has made the toll collection difficult because the agreement provides

for toll collection on every trip and the public is not willing to pay on each and every trip.

Toll on existing bridge:

The agreement provides for toll collection on the old two-lane bridge also. After the

completion of the new bridge, each bridge is now being used uni-directionally. This has

resulted in public objection for tolling the old bridge for which L&T has not made any

investment.

Learning from the above two cases

In both the above two cases we see that only one private party bid for the project inspite

of many incentives provided by the government. This problem mainly stems from

deficiency in project structuring. In the case of Mumbai pune expressway we see that

only Reliance bid for the project and that too they quoted an amount, which was

unacceptable to the government. In the case of Coimbatore bypass only L&T bid for the

project with the condition that the Attupalam Bridge should also be bundled with the

project though the bridge is geometrically not a part of the bypass to make it financially

feasible. A number of reasons may be cited for the failure to attract private participants.

Foremost among them is the uncertainty related with toll-based system where the

developers are themselves responsible for recovering their investment. Private

participants are unsure as to if they would be able to recover their investment due to

uncertainty in traffic density and attendant risk. And also due to the fluctuations in real

estate cost the valuation of subsidy through free allotment of land by the government is

difficult. This shows the need to change the project structuring and to look for

alternatives schemes to finance the project. We will be looking at various alternatives to

finance road sector development and involve private participants. But first of all lets look

at the objectives behind tolling of roads and the issues concerned with it

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Simply put toll-pricing means asking the people for usage of the road. Toll pricing can

have many objectives

??If the road has been built by a private enterprise or is the result of a public private

joint venture then road tolls may be implemented to recover the capital invested

and for generation of additional profits.

??Road tolls may also be implemented for much needed investment capital for new

infrastructure development and hence bridge the gap between demand and supply.

??Road tolls may be implemented for optimal and proper usage of the road so that

the road does not attract excess users. When a commodity is too cheap it will be

over consumed and hence lead to supply side constraints.

??In may western countries road tolls have been introduced as a mechanism for

reducing auto dependence among the people. There are also other targeted pricing

mechanism like smog fees to reduce pollution, weight/distance charges to

promote lighter vehicles, congestion pricing, gas taxes and fines to meet a variety

of objectives.

??The efficiency of road tolls depends on its design and its implementation. Road

tolls if designed in the wrong way may hurt the poorer section of the society.

Moreover if implemented at the wrong place it may divert traffic away from the

toll road and cause congestion at some other road. Moreover it has been observed

in many western countries that there are huge congestion near tollbooths, which

drive up the stress level leading to accidents, road rage and wastage of gasoline.

??Therefore much thinking needs to be done while designing the road toll. These are

some of the important steps that are needed to be taken

??The tolls collected should be income and tax progressive so the poorer sections of

the society are not hurt.

??The toll should be done on a geographically widespread basis so that dislocation

of traffic does not take place. They should be part of an overall transportation plan

instead of being negotiated on a road-by-road basis. It should be publicly

controlled and mandated to direct revenues to alternative modes of transportation.

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Issues concerned with toll roads:

Toll fixing and increments: As the future vehicular density and the willingness to

pay cannot be estimated accurately there is problem is fixing toll charge on roads. As in

the case of Coimbatore Bypass the no consideration was made for people’s willingness to

pay and demand for the bridge. This resulted in public opposition to toll collection.

Access control: Toll roads have to be access controlled. In India due to the prevalent

political and social systems access control will be very difficult to maintain. The chances

of people defaulting on their payment are high. This raises problems for the private

participant in toll collection and thus the project may ultimately turn out to be unviable

for the private player as seen in the case of L&T in the Coimbatore bypass case. There is

also the cost of monitoring toll plazas to prevent revenue leakage.

Flow of traffic: One of the prime objectives of toll roads is to reduce congestion. In

India toll charges, as an instrument to manage the flow of traffic is not viable as there are

hardly any other alternative route connecting two places. In such cases the toll charge

becomes a user charge for providing a service. Moreover even in case where alternatives

are available people unwilling to pay tolls may be unwilling to take the new road and this

will defeat the purpose of reducing congestion in the old road.

Social impacts: In a country like India where a large section of the population leaves

below the poverty line, implementing toll collection on roads effectively prevents them

from using that service. This necessitates the creation of alternative routes as for example

the creation of several underpasses in the case of Mumbai Pune Expressway. There is

cost to providing underpass for people not having access to motorized vehicular traffic.

Moreover the income and price elasticity for vehicular demand in India is still very high.

Hence there is no need to impose toll charges to reduce dependence on traveling by

personal vehicles.

Political opposition: Political opposition to tolling has been observed in many

countries. The opposition has meant that toll rates have not been increased as planned or

untolled facilities have been created to provide an alternative. Both this outcomes have

affect the financial viability of the project negatively thus driving private participants

away.

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Alternatives to toll roads:

Criteria for selection:

Any financing plan for the road sector development should be long term, on a legal basis

and should fulfill the following criteria

??The financing scheme should take into account the demand potential

demand for road traffic and the people’s willingness to pay. In a country like

India people willingness to pay become all the more important since any clash

between the service provider and the customer might take a political turn as in the

case of Coimbattore bypass.

??Private participation in India cannot be totally ruled out as the road funds itself

may not be able to bridge the gap between the demand and supply for roads. But

the present system of involving private participants in road sector development

needs to be overhauled as there are many loopholes mainly related to the recovery

fund invested by the private participants and the sharing of risk which in itself is

related to the traffic density and peoples willingness to pay.

??The road sector development should also take into consideration the varied

political, social and economic atmosphere in different parts of the country. As for

example if we take the case of the north-eastern region it would be totally foolish

to leave the road sector development to the private sector as few would be willing

to invest there due to the political and economic atmosphere prevailing there.

The MSRDC and the Coimbatore bypass case show that there are lots of loopholes in

implementing toll roads. The uncertainty attached with revenue generation is keeping

private participants from investing in road sector development. The government does not

provide any traffic density and attendant risk and hence they shy away from such

projects. Moreover the present tolling scheme has got lot of problems attached with it as

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mentioned above. So far of the 54000 NHDP projects only 1000 crore has materialized

through the BOT scheme. The next section of this paper tries to identify the various

alternatives available and their evaluation.

Shadow tolling:

Shadow tolling refers to the policy of paying the private investor a variable revenue

stream over time depending upon the usage of the road. The revenue stream depends

upon the types of vehicle plying on the road and the distance traveled. The type of

vehicles (heavy or light) may be detected through electronic sensors that are positioned at

predetermined places. Shadow tolling does not affect the behavior of the users because

they don’t have to pay any tolls. Therefore it eliminates the problem of traffic diversion

due to tolling and thus in turn reducing congestion and environmental pollution. It also

eliminates the problem of discrimination against region or communities. Funds for

shadow tolls can come from diverse (and multiple) government and/or private sector

sources, including national and state Highway Funds, special assessments on nearby

properties and regional dedicated tax streams. The main objective of this purpose is to

transfer the responsibly and the associated risks of construction, operations, maintenance

and traffic density to the private participants. Thus the prime objectives of shadow tolling

may be summarized as

??Traffic risk can be transferred to the private participant

??Traffic levels are not impaired by real tolls or toll increases and hence the

problems of traffic diversion and road congestion are eliminated

??Multiple sources of revenues can be drawn upon to contribute to a shadow toll

fund

??Project cost obligations to the public sector sponsor (capital, maintenance and

operations) can be reasonably known in advance and guaranteed for a particular

traffic level.

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Feasibility of shadow tolling in India:

Shadow based tolling is not feasible in India simply for the fact that private participants

are not ready to take up all the risks. These risks are mainly associated with the

uncertainty involved in traffic density, which cannot be explicitly projected. The constant

revenue stream, which has been promised to the private participant, has to come from

sources like road funds or special tax assessments on users. Hence shadow based tolling

is just another form of cross subsidization, which will be hard implementing unless the

problems associated with managing road funds are eliminated. These are problems

associated with the collection, administration and disbursements of funds from the

government to the private participant. It also involves setting up of expensive mechanical

vehicle estimation points which may lead to harassment of road users and corruption on

part of the regulating body. The unpredictable income stream may also be unpopular with

long-term financiers. There may also be manipulation of road traffic on higher side by the

promoter to maximize income.

Annuity based scheme

This at present is considered to be the most viable scheme for attracting private

participants. Due to the lukewarm response to its BOT scheme the National Highway

Authority of India is actively pursuing this alternative. Since most of the private

participants are risk averse the annuity scheme provides an attractive proposition to the

private participants to invest in the road sector. This scheme guarantees a fixed income to

the private participant every year during the concession period. This fixed revenue is

meant to cover the debt servicing cost borne by the private entity, operational and

maintenance cost and a reasonable return of equity to the private participant. The investor

also finds it easier to raise resources, as there is a guaranteed return on equity. Thus the

private participant is delinked from the risk associated with uncertainty in traffic density

and problems in collecting toll. There are two methods two finance this scheme so as to

provide a constant income to the private participant

??In the first method the government takes up the responsibility of collecting the

tolls and provides a constant income to the private participant from the revenue

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generated through tolls. This scheme is not viable as these have the same

problems that are associated with direct tolling of the users by the private

participants and the uncertainty in predicting traffic density.

??A dedicated Central Road Fund is created and the private participant is paid

through revenues generated through this fund. A Central Road Fund also exists in

India, which has been created by levying 1 Rs. on petrol and High Speed Diesel

for the National Highway Development Project (NHDP). This is expected to

generate 60 billion Rs. per year. But there are lots of political bottlenecks in the

administration and management of this fund. There are also the usual problems

related with disbursement of funds. Even then these system of financing is very

effective because it attracts private partnerships through guaranteed financial

returns and the problems associated with tolling and shadow tolling is not

associated with this problem.

Annuity based tolling has its own sets of problems. The foremost question is if the

dedicated central road fund is enough to finance all the annuity-based projects. There is

also the problem of leakage of funds and the management and the distribution of funds.

There is also the problem if uniform development of roads throughout India can be

carried out totally through annuity-based scheme. As for example private participants

may not at all be willing to venture into the northeast regions even if they are sure of a

premium and secure return on investment due to the political climate prevailing out there.

Road Fund and BOT Scheme

Another alternative is to allow the private participant to invest in all those projects that

they feel are financially viable on a BOT basis. The private participant will recover his

investment by levying tolls. The cost of land acquisition, environmental clearance,

shifting of utilities and other legal issues will be borne by the government so as to make

the project more attractive to private participants. All other risks like the risks involved

with traffic density, toll collection, interest rate fluctuation, foreign exchange fluctuation

etc will be borne by the private participant. The government will delink itself from the

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project after the initial work of structuring the bid and offering the project to a private

participant is over.

The central road fund will be used to develop all those areas where the private parties are

not willing to venture. An important step here will be to fence the road fund so that

money is not withdrawn from the funds for other purposes since in India there are many

competing investments. The prime issue here will be the management and disbursement

of funds.

This alternative has the advantage of the both the government and the private participant

actively participating in road sector development. With investment from the private

sector coming in areas, which they feel, are financially feasible, the government will have

more funds left for development of relatively backward and financially unviable region.

But even if the private sector invests, those roads will have the same problem of tolling.

The private participant will have to go for accurate demand estimation of traffic density

and willingness to pay.

Quasi public-private enterprise:

As seen in the case of Mumbai-pune expressway, the government can set up an

independent organization like the MSRDC to take up the financing and the construction

of the roads. Here again the government will lay down the initial seed capital and the

organization will have representatives from the government. The enterprise will have the

organizational and operational characteristics of a private firm so as to establish

efficiency, transparency and speed in project execution. The enterprise can raise money

through equity or through placements of bonds. It will recover its investments through

tolling. This alternative will have all the problems associated with tolling as mentioned

above and thus not fulfill the objective of attracting private investment.

RECOMMENDATIONS

After evaluating all the options we feel that the best alternative is the financing of road

sector is through a two-tier scheme combining both BOT contract with the private sector

and the use of the Central Road Fund.

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CENTRAL ROAD FUNDS

The government in 1999-2000 imposed a Re 1 cess on petrol in 1998-99 and the same on

high-speed diesel. The collection out of this cess goes into a non-lapsable, non-

diversionary Central Road Fund for the ambitious Rs 60,000-crore national highway

programme. The fund was formally created last year after Parliament cleared the Central

Road Fund Bill, 2000. The government later imposed an additional cess of RS.0.3 on

petrol and diesel to generate Rs 2,000 crore per annum which is proposed to be used for

the 7,300-km long north-south-east-west corridor project alone. 8However these alone

will not be sufficient to develop an effective road system in India as a large proportion of

villages are still without all-weather road connections. Most of the roads comprise of one

lane and in a number of urban areas, there is heavy congestion on roads and lack of

adequate mass transport system and the consequent explosion of the personalized modes

of transport (mainly two wheelers) has resulted in low speed, high energy consumption,

traffic jams as well as high levels of air and noise pollution and alarming rate of

accidents. Also it is very obvious that the provision of such a large network will not be

feasible with the road fund alone but also the participation of private sector (Ninth five-

year plan report (97-02).9

The two-tier scheme will finance part of the road sector development through the central

road fund and the other through BOT contract with the private sector. The private sector

will recover their financing schemes by levying tolls on the roads they have built for the

concession period. The following guidelines should be followed in the two-tier scheme

??The private sector should be allowed to invest in all those projects only which

they feel are financially viable and will give them an adequate return on

investment. The risk of traffic density and willingness to pay should be

completely passed on to the private participant. This means it is the responsibility

of the private participant for estimating the demand for the toll by taking into

8 The Economic Times official Website. Official Website

http://www.economictimes.com/250601/bn03a.htm 9 9 National Informatics Center official website. Online Article: http://www.nic.in/ninthplan/vol1/v1c2-9.htm

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consideration the political, social and economic climate of the region. The private

participant will have the full responsibility for selecting, designing and operating

the project. All the principal risk like demand side risk should be transferred to

the private participant.

??The government may here encourage private participation by bearing the cost of

acquisition of land, shifting of utilities and the cost of environmental and legal

clearance. The government and the private participant will have to mutually agree

upon the return on investment upon the return on investment which will determine

the period of concession. Hence the concession period and the technical

qualification of the private participants should be the sole criteria for evaluating

the bid process. The toll charge will be determined by the private participation

based on the demand for the road and the willingness to pay. Other incentives like

safeguard from foreign exchange fluctuations and reduction in custom duties on

imported equipments may be done on a project-to-project basis.

??The Central Road Fund should be used for all those projects where no private

players are willing to invest. Private sector investment in India is still at an

infancy state and hence the government still has an important role to play. Such

investment may be in projects, which the government feels are strategically

important, or projects pertaining to the universal dispersal of road sector

development. The investment in such projects may be carried out by the by setting

up an independent and commercial firm for managing the central road fund. The

key issue here will be the management of the Central Road Fund.

Managing road fund:

The road funds should not be simply a loosely managed off-budget accounts. They

should be based on a set of important design principles and should be fenced from all

other competing budgetary requirements. Decision should also be made as to for what

purpose the road funds will be used. The road funds may be used to finance only national

highways or it may also be used to finance state and rural roads.

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If the road fund is only going to finance main roads, it could be managed through a

separate division in the NHAI (as in South Africa). On the other hand, if it is going to

finance a number of different roads, it should be managed through a separate road fund

administration (to avoid any conflict of interest). The road fund should be overseen by a

representative board, which could either be a separate board, or a sub-committee of the

board, which oversees management of the road network. Members should ideally be

nominated by the constituencies they represent like representatives of bus and lorry

owners association, regional representative (state wise) and there should be an

independent chairperson.

The road fund revenues should be collected using a simple two-part tariff consisting

primarily of an access fee (vehicle license fees and Road tax) and a user fee (like the

current system of levy on fuel and fines for overloading). The tariff should be designed to

ensure it does not abstract revenues away from other sectors. Road users should finance

extra spending on roads through extra payments, i.e., the extra revenues must be in

addition to all pre-existing taxes going into the consolidated fund. There should be a

consistent procedure for regularly raising and lowering the road tariff. Since there will

often be concerns that tariff increases - particularly increases in the fuel levy - may have

adverse repercussions on the consumer price index and hence on the economy. The board

may need to examine the impact of proposed increases in the fuel levy on the economy.

Problems may also arise due to the use of diesel by other sectors like manufacturing.

Conclusion:

We feel that for a resource scarce country like India government alone will not be able to support

the huge requirements of infrastructure projects. So government should actively pursue to attract

private sector investments to this sector by simplifying the projects with clarity in regulation and

clearances and by reducing externalities. We have attempted to come out with certain guidelines

based on the learnings from the cases and other sources, which could be used as pointers towards

future private-public partnership projects.

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Bibliography

Government of India, Ministry of Finance, Economic division: Economic Survey 2000-

2001

Hassan Abul, M. IAS. Coimbatore Bypass Experiences, Pointers to the Future Public

Private Partnership Projects.

Hassan Abul, M. IAS. A Note on Toll Collection in Coimbatore Attupalam Bridge.

Raghuram, G., et al., Infrastructure Development and Financing, Towards a Public-

Private Partnership. Ahmedabad: Indian Institute of Management.

3iNetwork, India Infrastructure Report 2001, Issues In Regulation and Market Structure

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Internet Documents

“Annuity based returns for roads to lure private sector.” Online: Article

http://www.economictimes.com/161100/16infr 02.htm

Bongirwar, P.L and Momain, S.S.”Theme: the Mumbai pune expressway: From concept to commissioning.”

http://www.icjonline.com/june 2ka.htm

June 2000

“Concession agreement”. Online: National Highway Authority of India

http://www.nhai.org/concession-agreement.htm

Dandekar, C Hemlata and Mahajan, Sulakshana.”MSRDC and Mumbai Pune Expressway: A sustainable model for privatizing construction of physical infrastructure”.

http://www.epw.org.in/36-7/content.htm

17 February 2001

“Roads and highways: toll roads.” Online: World Bank

http://www.worldbank.org/html/tpd/transport/roads/toll_rds.htm

“Shift to annuity based tolling for roads.” Online: Article

http://www.economictimes.com/290200/29econ22.htm

28 February 2000

“TIDCO-Indian policies-Indian infrastructure-National Highways Policy.” Online: TIDCO

www.tidco.com/india-policies/india-infra/national_highways policy_asp

“Government policy initiatives.” Online: National Highway Authority of India

http://www.nhai.org/govt.policy.htm

“Annuity based returns for roads to lure private sector.” Online: Article

http://www.economictimes.com/161100/16infr 02.htm

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“MSRDC-Mumbai Pune Expressway Project.” Online: MSRDC

http://www.msrdc.org/projects/mumbai-pune.html

“History crosses Mumbai Pune Highway.” Online: Article

http://www.expressindia.com/ie/daily/19990518/ile 18030.html

8 May ,1999

“The Mumbai Pune expressway.” Online: Article

http://www.financialexpress.com/te/daily/2000o730/fec 300031.html

Venkataraman, Kavita and Raman, TMA. L&T may pull out of Coimbatore bypass project. Online Article: http://www.financialexpress.com/fe/daily/19991020/fco20046.html

October 29, 1999

Raman, TMA.L&T looking for partner to divest equity in Coimbatore bypass. Online Article:

http://www.expressindia.com/fe/daily/19981022/29555414.html

October 22, 1998

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Exhibit 1: Government policy initiatives

Policy Initiatives for Attractive Foreign / Private Investment

1. Government will carry out all preparatory work including land acquisition and utility removal. Right of way (ROW) to be made available to concessionaires free from all encumbrances.

2. NHAI / GOI to provide capital grant up to 40% of project cost to enhance

viability on a case to case basis 3. 100% tax exemption for 5 years and 30% relief for next 5 years. May be

availed of in 20 years. 4. Concession period allowed up to 30 years 5. Foreign direct investment up to 100% equity partners for construction of

roads and bridges. 6. Arbitration and Conciliation Act 1996 based on UNICTRAL provisions. 7. The Housing and Real Estate development which is an integral part of the

Highway project will be treated as infrastructure and will be entitled for same tax benefits

8. NHAI permitted to participate in equity in BOT projects upto 30% of total

acre. 9. Almost duty free import of modern high capacity equipment of highway

construction. 10. Private sector allowed to retain toll money. 11. Strengthening of Central Road Fund. Its final format should ensure that the

cesses and other charges like tolls are domiciled in a non-diversionary fund. 12. NHAI to look at highways as a service rather than only from the point of view

of construction. Safety, performance and operational indices to be incorporated in tender documents.

Exhibit II: Construction details of Mumbai pune

expressway

Section-wise details and names of PMCs and contractors involved in the project

Section Length, km

Estimated cost Rs crore

Tender amount Rs crore

Name of PMC

Name of contractor

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Rs crore Rs crore r

Section A (Kon to Chowk)

13.232 127.33 136.82 Stup Consultants with Hyder

IJM/SCL joint venture

Section B (Chowk to Adoshi)

16.629 195.05 194.00 Inter Continental Consultant & Technocrats Pvt Ltd (India)

Hindustan Construction Co, Mumbai

Section C (Kusgaon to Ozarde)

22.995 177.46 163.56 Frischmann Prabhu (India) Pvt Ltd

Larsen & Toubro Ltd, Chennai

Section D (Ozarde to Dehu Road)

16.150 132.70 133.47 Sir Owen Williams Investment Ltd

Jog Engineering Ltd, Pune

Ghat Section

Package I: Adoshi to long tunnel

7.130 86.46 93.15 Consulting Engineering Services (India) Ltd

Shapoorji Pallonji & Co, with Lighten Asai joint venture

Package II: Long tunnel to Lonavla bypass

8.280 108.96 104.35 Consulting Engineering Services (India) Ltd

Larsen & Toubro Ltd, Chennai

Panvel bypass Package I: 0/0 to 8/200

8.200 108.00 88.89 Technogem Consultants, Thane

PBA-PCEC (joint venture), Mumbai

Package II: 8/200 to 9/750

1.550 64.50 49.99 Technogem Consultants, Thane

M Venkat Rao, Visakhapatnam

Tunnel work 5 twin tunnels

5.724 200.00 200.00 Konkan Railway Corporation Ltd

Other expenses: Toll plaza, building, fencing, sign boards, technical consultant

324.00

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s' fees, etc

Total 1488.00

Maharashtra State Road Development Corporation http://www.msrdc.org/projects/mumbai_pune.html

Exhibit III: Special features of construction (Mumbai

Pune Expressway)

The Mumbai-Pune expressway has several special construction features, which are briefly elaborated below.

• Under each contract, the total length assigned to a contractor was 16 to 20 km, which can be conveniently managed by him.

• Each section has got independent number of access and each side is accessible by adjoining roads.

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• Several quarries were available within the stretch and the average lead works out to 3 to 4 km, which indirectly reduces the burden on the contractor.

• Useful materials available from cutting like stone, the contractor without any extra charges/cost can use murum, etc.

• All the structures on expressway are simple in nature, except viaducts in Section B having height of 20 m and above.

• Shortage of construction material including cement was not anticipated.

• The total formation width is about 45 m, and as such sufficient workspace is available to the contractor for deploying large number of construction equipment.

• Most of the work to be done using heavy machinery considering work volume and time limit.

Indian Concrete journal official website http://www.icjonline.com/june2ka.htm

Exhibit IV: Special features of the contract (Mumbai

pune expressway)

The contract was based on the FIDIC format, which is generally adopted on international contracts of World Bank-aided projects. The FIDIC format has been modified to suit the special requirements of this project. Some of the important provisions in the contract are highlighted below.

• As a measure to cover financial risks of the contractors, the contract provided for payment of price variation as per a pre-determined formula linked to various price-related indices.

• As a further measure of risk coverage, the contract provides for full reimbursement of customs duty paid by the contractor for importing construction machinery necessary for the work.

• Foreign exchange fluctuations in respect of the exchange spent for purchase of construction equipment would also be borne by MSRDC.

• The contracts have a provision for payment of bonus to the contractors for early completion at the rate of Rs 20 lakh per week of

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early completion. It has also a provision for levy of penalty of Rs 30 lakh per week of delay in completion.

• Early payment of the contractor’s bills has been guaranteed and delay in payment of certified bills beyond 10 days would entitle the contractor to an interest of 15 percent on undisbursed amount.

• Mobilization advance of 10 percent and machinery advance of 5 percent is allowed to the contractor at 15 percent interest.

• Contractors have been exempted from payment of royalties on construction material used on this project.

• Simple dispute redressal mechanism was evolved.

• In case of abandonment of work or termination of contract, the balance work need not be carried out at the risk and cost of the contractor.

Indian Concrete journal official website http://www.icjonline.com/june2ka.htm