APPENDIX I

PPP - Public Private Partnership

VGF -Viability Gap Funding

IIFCL -Indian Infrastructure Finance Limited

TA -Transaction Advisers

IIPDF -Indian Infrastructure Project Development Fund

O&M -Operation and Maintenance

MCA -Model Concession Agreement

NPV - Net Present Value

GHIAL - GMR-Hyderabad International Airport Ltd.

MAHB - Malaysia Airports Holding Berhad

GoI - Government of India

GoAP - Government of Andhra Pradesh

GoR - Government of Rajasthan

AAI -Airport Authority of India

ICAO -International Civil Aviation Organization

IRA -Independent Regulatory Authority

NHAI - National Highway Authority of India

SPV - Special Purpose Vehicle

CA - Concession Agreement

MCA - Model Concession Agreement

SPCD - Scheduled Project Completion Date

LOA - Letter of Acceptance

COD - Commercial Operation Date

MOU - Memorandum of Understanding

1

Chapter 1

ABOUT THE STUDY

1.1 INTRODUCTION:

In recent years countries around the world have met the challenge of developing and

maintaining critical infrastructure by restructuring public utilities and expanding private

sector participation in the infrastructure sectors. Recognizing the importance of adequate

infrastructure services, and given the constraints on public budgets to finance these growing

infrastructure needs, governments have sought to shift part of the burden of new infrastructure

investment to the private sector. Government has been actively engaged finding the

appropriate policy framework, which would give the private sector adequate confidence in

investing into infrastructure projects and at the same time, have adequate checks and balances

through transparency, regulation and competition. Consequently, Public Private Partnerships

(PPPs) are being actively encouraged for execution, operation and maintenance of

infrastructure projects in India.

Over the lifespan of these projects the legislative, political, social, market and

economic environment could all change significantly. This is especially the case in

developing countries, where the social, political and economic conditions are unstable. Thus

a high degree of risk and uncertainty surround PPPs and it is critical that adequate

identification, assessment, and evaluation of these risks take place. These risks have a high

degree of impact on the feasibility of the project, which is a key parameter in the successful

implementation of the project.

The concession agreement plays a very important role in PPP. The concession

agreement provides a regulatory framework of how the PPP should be implemented. It

defines the relation between the parties and can be considered as the core of PPP project. It

addresses issues which are very important for the successful completion of project such as

mitigation and unbundling of risks and allocation of risks.

2

Considering the importance of all the above, in this thesis, the various types of PPP

models, concession agreements and risk management are studied.

1.2 SCOPE OF THE STUDY:

In this thesis it has been attempted to study the

Different types of PPP models

Various risks associated with PPP and their impact on the feasibility of the project

Concession agreements of PPP in three sectors viz. aviation, highways and urban

infrastructure

The provisions for risk mitigation in the agreements

An attempt to give some recommendations for risk mitigation and enhancement of

productivity of PPPs has also been made.

1.3 METHODOLOGY OF STUDY:

Detailed literature survey

Prepared rough draft on types of PPP models, various risks, its assessment and mitigation

methods

Obtained Case Study materials

Detailed study of project and concession agreement of the cases

Observations and Recommendations

Preparation of pre-final drafts

Final Report Writing

3

Chapter 2

PUBLIC PRIVATE PARTNERSHIPS

2.1 INTRODUCTION:

Public Private Partnership (PPP) project, which is based on a contract or concession

agreement between a government or statutory entity on one side and a private sector company

on the other side, for delivering an infrastructure service on payment of user charges. The goal

is to combine the best capabilities of the public and private sectors for mutual benefit. PPPs

are used to build new and upgrade existing public facilities. Compared with traditional

procurement models, in PPP the private sector assumes a greater role in the planning,

financing, design, construction, operation, and maintenance of these facilities.

For a country of India’s size, provision of quality infrastructure becomes a must to maintain

and continue towards higher growth trajectory. To meet this need, the government has stepped

up investments towards infrastructure through PPP. The Eleventh Five Year Plan has set an

ambitious target of increasing total investment in infrastructure from around 5% of GDP in

the base year of the plan 2006-07 to 9% by the terminal 2011-12. Around 30% of the required

investment of around Rs 2,056,150 crore will have to come from private capital.

The confluence of rising infrastructure needs and social demands, combined with tight

governmental budgets and public resistance to additional tax increases, has made it essential

for public authorities to turn to the innovative qualities and access to operating capital

possessed by the private sector in order to fulfill responsibilities.

2.2 TYPES OF PPP

2.2.1 Design-Build (DB):

Under this model, the government contracts with a private partner to design and build a

facility in accordance with the requirements set by the government. After completing the

facility, the government assumes the responsibility for operating and maintaining the facility.

This method is also referred to as Build-Transfer (BT)

4

2.2.2 Build Own Operate (BOO):

The government grants the right to finance, design, build, operate and maintain a project to a

private entity, which retains ownership of the project. The private entity is not required to

transfer the facility back to the government.

2.2.3 Build Operate Transfer (BOT):

The private business builds and operates the public facility for a significant time period. At

the end of the time period, the facility ownership transfers to the public.

2.2.4 Build-Own-Operate-Transfer (BOOT):

The government grants a franchise to a private partner to finance, design, build and operate a

facility for a specific period of time. Ownership of the facility is transferred back to the public

sector at the end of that period.

2.2.5 Buy Build Operate (BBO):

The government sells the facility to the private business. The private business refurbishes and

operates the facility.

2.2.6 Design Build-Operate (DBO):

A single contract is awarded to a private business which designs, builds, and operates the

public facility, but the public retains legal ownership.

2.2.7 Design-Build-Maintain (DBM):

This model is similar to Design-Build except that the private sector also maintains the facility.

The public sector retains responsibility for operations.

2.2.8 Build-Develop-Operate (BDO):

The private business buys the public facility, refurbishes it with its own resources, and then

operates it through a government contract.

5

2.2.9 Build-Own-Lease-Transfer (BOLT):

The government grants the right to finance and build a project which is then leased back to the

government for an agreed term and fee. The facility is operated by the government. At the end

of the agreed tenure the project is transferred to the government.

2.2.10 Contract Add and Operate (CAO):

CAO can be said to be a contractual agreement whereby the project developer adds to an

existing infrastructure facility which it rents from the government and operates the expanded

project over an agreed as a period franchise. There may or may not be a transfer arrangement

with regard to the added facility provided by the project developer.

2.2.11 Develop Operate and Transfer (DOT):

DOT can be said to be a contractual arrangement whereby favourable conditions external to

the new infrastructure project which is to be built by a private developer are integrated into

the arrangement by giving that entity the right to develop adjoining property, and thus, enjoy

some of the benefits created by the investment such as higher property or rent values.

2.2.12 Rehabilitate Operate and Transfer (ROT):

ROT can be said to be a contractual arrangement whereby an existing facility is turned over to

a private entity to refurbish, operate and maintain for a specific period as a franchisee, on the

expiry of which, the legal title to the facility is turned over to the government. The term is

also used to describe the purchase of an existing facility from abroad, refurbishing, erecting

and consuming it within the host country.

2.2.13 Rehabilitate Own and Operate (ROO):

ROO can be said to be a contractual arrangement whereby an existing facility is turned over

to the private sector for refurbishing and operation with no time limit on ownership. As long

as the operator has not violated the franchise, it can continue to operate the facility in

perpetuity.

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2.2.14 Lease Renovate Operate and Transfer (LROT):

LROT can be said to be a contractual arrangement whereby an existing infrastructure facility

is handed over to private, parties on lease, for a particular period of time for the specific

purpose of renovating the facility and operating it for a specific period of time; on such terms

and conditions as may be agreed to with the government for recovering the costs with an

agreed return and thereafter, transferring the facility to the government. The Ministry of

Power has adopted this route for the renovation of existing power plants.

2.2.15 Design-Build-Operate (DBO):

Under this model, the private sector design and builds a facility on the turn-key basis. Once

the facility is completed, the title for the new facility is transferred to the public sector, while

the private sector operates the facility for a specified period. This model is also referred to as

Build-Transfer-Operate (BTO).

2.2.16 Design-Build-Finance-Operate/Maintain (DBFO, DBFM or DBFO/M):

Under this model, the private sector designs, builds, finances, operates and/or maintains a new

facility under a long-term lease. At the end of the lease term, the facility is transferred to the

public sector. In some countries, DBFO/M covers both BOO and BOOT.

2.3 BENEFITS OF PPP:

The issue of private sector participation is high on the political, economic, and social agenda

of many countries, with the key challenge being to devise arrangements that are predictable

and sustainable, while delivering better services. Infrastructure is essential to supporting

economic growth.

Private sector participation in this sector offers clear benefits, as follows:

Stimulate economic growth

Improved and expanded infrastructure services that would not be there otherwise

7

Technology transfer, training of local personal and development of national capital

markets

Competition and innovation

Improved efficiency

Faster implementation

Relieving the government budget and borrowing

Providing a benchmark with which to judge the public sector’s performance

Better allocation of risk between the public and private sectors

Improve service delivery

Improve cost-effectiveness

Increase investment in public infrastructure

Reduce public sector risk

Deliver capital projects faster

Improve budget certainty

Make better use of assets

Private sector participation brings with it a more commercial approach to infrastructure

provision, reducing political intervention. Governments, distanced from their responsibility of

providing the infrastructure service itself, can tackle other issues such as tariff reform.

2.4 IMPLEMENTATION OF PPP PROJECTS:

Implementation of PPP involves sharing of the risk from public to private party. The Roles,

Skill Requirements and Risks for public and private parties in different types of contracts are

shown in the figure

8

Fig 2.1 Risks of Private Parties in PPP Projects

2.5 FRAMEWORK FOR PPPS IN INDIA

To address various constraints in the PPP model, several initiatives have been taken by the

Government of India to create an enabling framework for PPPs by addressing issues relating

to policy and regulatory environment. Progressively, more sectors have been opened to

private and foreign investments levy of user charges is being promoted, regulatory institutions

are being set up and strengthened, and fiscal incentives are given to infrastructure projects.

Therefore the government has come out with various initiatives such as:

Scheme for financial support to PPP in infrastructure- viability gap funding (VGF)

Scheme for financing viable infrastructure projects through a special purpose vehicle-

Indian Infrastructure Finance Company Limited (IIFCL)

Establishment of the Indian Infrastructure Development Fund

Empanelment of Transaction Advisers (TAs) for PPP projects

2.5.1 Viability Gap Funding (VGF) Scheme:

The VGF Scheme of the government of India provides financial support in the form of

grants to infrastructure projects undertaken on PPP mode-a capital grant at the stage of project

construction. These grants are either one time or deferred basis, and are strictly restricted for

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FullyPublic

FullyPrivate

Operation & Maintenance contract

Design Build

Design Build Operate

Lease Develop Operate

Buy BuildOperate

Build Transfer Operate

Build Operate Transfer

Build OwnOperate

Roles, Skill Requirements, and Risks of Private Sector

Low High

the purpose of making the projects commercially viable. The ministry of finance administers

this scheme. The scheme restricts its applicability to ‘infrastructure service’, which includes

roads and bridges, railways, seaports, airports, inland waterways, power, urban transport,

water supply, sewerage, solid waste management and other physical infrastructure in urban

infrastructure projects in special economic zones, international convention centres and other

tourism infrastructure projects. Another prerequisite for the applicability of the scheme is that

the project should provide the infrastructure service against the payment of a pre-determined

tariff or user charge.

Under this scheme, the support of the government in the mode of VGF shall not

exceed 20% of the total project cost; but the government or statutory entity may grant an

additional 20%, only out of its own budget.

2.5.2 Indian Infrastructure Finance Company Limited (IIFCL):

Indian Infrastructure Finance Company Limited (IIFCL) has been set up with the

specific mandate to play a catalytic role in the infrastructure sector by providing long-term

financing to infrastructure projects in India. IIFCL raises funds both from the domestic as well

as external markets on the strength of the government guarantees. An offshore SPV, Indian

Infrastructure Finance Company (UK) Limited has been set up to utilise part of foreign

exchange reserves for infrastructure development. Lending by IIFCL is again restricted to

projects involving ‘infrastructure services’. IIFCL finances only commercially viable projects.

IIFCL therefore, also finances those PPP projects, which become viable after receiving the

VGF. IIFCL restricts its lending to only projects implemented i.e., developed, financed and

operated for the project term by a public sector company, a private sector company selected

under a PPP initiative or a private sector company. The project company borrowing from

IIFCL should be set up on a ‘non resource basis’ (should be a special purpose vehicle for the

project). The scheme provides for option of seeking ‘n principle’ approval for financial

assistance by the sponsoring entity.

Under this scheme, the actual lending is governed by appraisal of the lead bank before

financial closure of projects. The lead bank is responsible for regular monitoring and periodic

10

evaluation of project compliance with agreed milestones and performance levels especially

with respect to disbursement of IIFCL funds. IIFCL provides for funding viable infrastructure

projects through long term debt, or refinancing to banks and financial institutions for loans

granted by them or with tenure exceeding 10 years, or any other mode, which may be from

time-to-time, be approved by the government. The lead bank further takes the responsibility

of disbursing the loans advanced by IIFCL and also the recovery of the same. For smooth

conduct, IIFCL enters into a tripartite agreement with the lead bank and the project company

for every individual project.

2.5.3 Indian Infrastructure Project Development Fund (IIPDF)

Quality advisory services are fundamental to procuring affordable, value-for-money

PPPs. The cost of procuring these transactions advisers for the PPPs is also significant. IIPDF

is corpus fund set up for the purpose of providing financial support for quality project

development activities to the states and the central ministries. IIPDF has been created in the

Department of Economic Affairs, Ministry of Finance, and Government of India for

supporting the development of credible and bankable PPP projects that can be offered to the

private sector. IIPDF is the scheme for funding to cover a portion of the PPP transaction costs,

thereby reducing the impact of costs related to procurement on their budgets.

IIPDF is not aimed to act as a source of grant funding for the sponsoring authorities

but to assist the sponsoring authorities with up to 75% of their project development expenses.

It has also been mentioned in the scheme that as the IIPDF matures with experience and time,

a suitable autonomous legal structure is considered by the government for the management of

the IIPDF. Therefore, IIPDF is to assist project that closely support the best practices in PPP

project identification and preparation as set out in guidance to be issued by the Department of

Economic Affairs from time-to-time.

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2.5.4 Transaction advisers for PPP Projects

PPPs are still in their infancy stage in India. A systematic compilation of knowledge and

experiences on PPP projects across sectors, greater awareness of good examples and

established procedures will certainly add execution clarity of the sponsoring entity and also

will provide quality information to investors on PPP schemes and incentives.

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Chapter 3

RISKS IN PPP

3.1 CLASSIFICATION OF RISK

Understanding and addressing the risks of a PPP project early on is important for both the

parties in PPP. This chapter presents many of the risks involved and actions that can be taken

to mitigate them.

Promoters would invest in a project only if the risks in the project are less than the reward

which the project fetches. PPP projects carry several risks that are unique to this type of

delivery system in addition to the risks associated with more traditional assignments. Some of

the risks in PPP are

Market and revenue risks.

Design risks

Construction risks

Operating risks

Financial risks

Political risks

Legal risks

Environment risks

Force Majeure risks

3.1.1 Market and Revenue risks

Revenue risk is the uncertainty in relation to the revenue that a project would actually

generate. The market and revenue risks that a PPP project may face can be grouped into the

three broad areas discussed below.

Insufficient Income from Fares or Tolls. In the case of a PPP project operating under a

government concession, it would be expected that that the concession company would

request a cash compensation from the government for a deficiency in income from fares or

tolls, request authority to increase tolls or fares, or extend the concession period. Here it is

13

necessary to identify its risks clearly with respect to cash flow or its returns, as they may be

affected by an extended concession period.

Insufficient Income from Other Operations. In this case, similar opportunities exist for

requesting the government to provide cash compensation for deficiencies and/or extending

the concession period. In addition, the concession company would have opportunities to

increase rents or pursue different business strategies, including alternate uses of major

portions of the concession facility.

Insufficient Traffic. It is important for the PPP contractor to obtain a commitment from the

government, to the extent possible, with respect to anticipated traffic levels and to

negotiate a sufficient compensation arrangement for deficiencies. In the event that the

government has not offered to provide such additional compensation, needs review its role

carefully as it relates to traffic and earnings forecasts for a PPP project.

3.1.2 Design Risks

This risk relates to any defect in the design of the infrastructure facility or the design

requirements stipulated for the project. This is an inherent risk in the project as it is very

difficult to conclusively ascertain that damage to the facility is actually caused due to the

defect in the design parameters or the very design itself. Generally it is the design contractor

who is responsible for the design aspects of the project. In the event of the design parameters

being stipulated by the grantor of the concession or license, the risk would be within the

control of the grantor.

3.1.3 Construction Risks

The construction risks are essentially a bundle of various individual risk factors that adversely

affect the construction of a project within the time frame and costs projected and at the

standards specified for the facility. Construction risks are associated with PPP projects, more

traditional construction projects and the simpler forms of design/build projects. They include:

Land Expropriation. These risks may flow to both the government and concession

company. Available actions include claims under expropriation legislation or claims by

the concession company of liquidated damages from the contractor.

14

Cost Overruns and Time and Quality. These risks affect the concession company directly.

The available actions are to either claim liquidated damages from the contractor or draw

down standby finance from the project lenders. (A major issue is that design requirements

in PPP projects are different than those for a traditional owner.)

Cost and Scope of Identified but Unspecified Work and Variations. These risks flow

directly to the contractor and the concession company and represent a potential area of

future disputes.

Increased Financing Costs. This risk flows directly to the concession company, which

may attempt to mitigate the risk either by a new injection of equity or subordinated debt

from the sponsors. Alternatively, the concession company may draw down standby

finance from project lenders.

Contractor Default. This is a risk to the concession company, which may claim liquidated

damages from the contractor or make a claim against the contractor’s performance bond

and bonding company.

Default by Concession Company. This is the flip side of the prior risk. This risk is to the

contractor, with the primary mitigating measure being claim of liquidated damages from

the concession company.

Environmental Damage. This risk accrues to the concession company primarily and may

result in claims on insurers or the party causing the damage.

Force Majeure Event. This risk accrues to the concession company primarily and would

result typically in a claim to the project insurers.

3.1.4 Operating Risks

Some of the risks that we may face in a PPP project apply also when we are providing

operations and maintenance (O&M) -type services. Except for termination of the concession

by the concession company, these risks flow directly to the concession company. Some of the

risks and actions available to the concession company include:

Performance risk: The completed facility cannot be effectively operated or maintained to

produce the expected capacity, output or efficiency.

Operation cost overrun: The operating costs exceed the original estimates

15

Operating Contractor Default: The concession company may terminate the operations

and maintenance contract and appoint a new O&M contractor

Force Majeure or Environmental Damage: In this type of event, the concession company

would most likely place a claim with its insurers because risks of this type would be

normally insurable.

Default: The default may be caused by the actions of a third party, in which case the

concession company could make claims of damages against that party.

3.1.5 Financial Risks

Financial risks fall into these categories:

Exchange rate risk relates to the possibility that changes in foreign exchange rates alter

the exchange value of cash flows from the project. Prices and user fees charged to local

users or customers will most likely be paid for in local currency, while the loan facilities

and sometimes also equipment or fuel costs may be denominated in foreign currency. This

risk may be considerable, since exchange rates are particularly unstable in many

developing countries or countries whose economies are in transition. In addition to

exchange rate fluctuations, the project company may face the risk that foreign exchange

control or lowering reserves of foreign exchange may limit the availability in the local

market of foreign currency needed by the project company to service its debt or repay the

original investment.

Interest rate risk. Force the project to bear additional financing costs. This risk may be

significant in infrastructure projects given the usually large sums borrowed and the long

duration of projects, with some loans extending over a period of several years. Loans are

often given at a fixed rate of interest (for example, fixed-rate bonds) to reduce the interest

rate risk. In addition, the finance package may include hedging facilities against interest

rate risks, for example, by way of interest rate swaps or interest rate caps.

3.1.6 Political Risks

The project company and the lenders face the risk that the project execution may be

negatively affected by acts of the contracting authority (Government), another agency of the

Government or the host country’s legislature. Such risks are often referred to as political risks

16

Nationalisation of project

Changes in law

Development approvals

Adverse government action or inaction

Payment failure by government

Increases in taxes

Political force majeure (including changes in government)

Termination of concession by government (or unplanned competition).

3.1.7 Legal Risks

Some of the legal risks that a PPP project can face are related to:

Title/lease of property

Ownership of assets

Corporate and security structure

Financial failure or insolvency of concession company

Breach of financing documents

Enforceability of security.

3.1.8 Environment Risk

These are risks relating to occurrence of environmental incidents during the course of

implementation of the project. These risks are generally within the control of the construction,

and the operation and maintenance consortium. This risk has increased due to the presence of

strict legal liability in relation to such environmental incidents, which can result not only in

adverse affects on the financials of a project but may also cause a closure of any work or

operations of and in relation to the facility.

3.1.9 Force Majeure Risks

These risks are regarding the events that are outside the control of any party and cannot be

reasonably prevented by the concerned party. These risks generally arise due to causes

extraneous to the project. The defining of force majeure events, these include:

Natural force majeure events

Direct political force majeure events

17

Indirect political force majeure events

Natural force majeure events comprise of all events that can be attributed to natural conditions

or acts of God such as earthquakes, floods, cyclones and typhoons. These risks should be

shared equally among the parties.

Direct political force majeure events are events attributable to political events that are specific

to the project itself such as exploration, nationalization.

Indirect political force majeure events are events that have their origins in political events but

are not project specific such as war, riots etc.

However, the mechanism of managing and mitigating such risks cannot be categorically

stated as they vary with each project and the circumstances surrounding each project.

3.2 RISK MITIGATION:

Identify risk Determine

severity of risk

Allocate the risk Mitigate the riskPrice the risk

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Identifyingthe eventsor ActionswhichEffects theViability ofthe Project

In Case theEvent occurthe effect ofthe same onthe cost /time of theproject

Identifyingandallocatingthe risk tothe partywho canmanage itbest

Steps /actionswhich canbe taking toreduce thechances ofthe eventoccurring

Cost ofthe risk addressing haveto bedetermined

3.2.1 Risk Mitigation Steps

Table 3.1

3.2.2 RISK MITIGATION STRATEGIES:

Infrastructure Facility: The main aim of the government should be to ensure the

construction, operation and maintenance of the required infrastructure facility at specific

standards, within a certain time frame and ensure its transfer at certain standards, upon the

developer obtaining the agreed returns.

Certain Costs: The government should ensure that the cost of construction, operation and

maintenance of the infrastructure facility are certain and can adequately balance the

requirements of the private developer and those of the general users or consumers and the

lenders.

Prevent unjust enrichment by Developer: The government should ensure that the

private parties vested with the control and operation of a public service or a public facility

should not abuse their position to unjustly profit from the venture at the expense of public

money.

Prevent Abuse of Monopoly: The government should ensure that the private developers

do not abuse their natural monopoly position in respect of the provision of an

19

infrastructure facility and that they exercise their rights specifically vested with a public

character in the interests of the public, as a public utility.

Return of the Facility to Public: The government should ensure that the facility is

transferred for use to the public after the satisfaction of the terms on the basis of which

private participation had been based.

Environment: The government should ensure that the facility is constructed, operated and

maintained with the minimum possible impact on the environment or an acceptable level

of impact on the environment.

Rehabilitation and Social impact: The government should ensure that the persons

displaced by the implementation of a project are adequately rehabilitated and the social

impact of the project is ascertained prior to its planning and implementation as to provide

for suitable mitigation measures.

The government should support the development of infrastructure projects as it does

not have the revenue or the technical resources to develop the required infrastructure in

various sectors.

The government should provide for a suitable legal framework and policies within

which the specific concerns relating to the development of infrastructure projects through

private participation and bankability of projects can be addressed.

The private developer should not become the basket for storing all risks simply on the

basis that it is obtaining a commercial return. It should be kept in mind that the

commercial return would be derived over a long period of time and at the risk of a high

degree of upfront investment. This also enables the government revenues from becoming

free from the demands of providing such infrastructure facilities and at the same time

allowing for the development of such facilities.

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Certainty of Costs: Each application, each risk and each uncertainty has an attached cost.

The aim of the developer should be to ensure that project costs can be determined and

controlled in a certain manner.

Return on Investment: The project and the documentation should be capable of

providing an adequate return to investors in the project. This is a universal necessity in

order to justify any private investment in any venture.

Bankability: The project and the documentation should be bankable so as to enable the

developer to arrange for the required debt facilities to implement the project.

Distribution and Management of Risk: The documentation in relation to the project

should be such so as to enable passage of various risks that are not within the control of

Special Purpose Vehicle but it has been allocated to it under the main concession or

license. The developer should not be straddled between the various documents with risks

it has no control over or is not capable of absorbing. Thus, the risks allotted under the

concession or license should flow down to the various contractors under the relevant

documentation with the contractors.

Vesting of Adequate Rights: The special purpose vehicle should be vested with all the

rights required for enabling it to develop the project. This includes the right to create

adequate security in favour of the lenders.

Control over the Revenue Stream: The special purpose vehicle should have adequate

control over the revenue stream to create security in favour of the lenders.

Provision of level playing field: In most infrastructure sectors, there is a great conflict of

interest between the government as the service provider and government as the grantor of

21

the concession. There should be specific arrangements provided for minimizing the

adverse impact of such a potential conflicts of interests.

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CHAPTER 4

CASE STUDIES

4.1 INTRODUCTION

An understanding between a company and the host government that specifies the rules

under which the company can operate locally is known as Concession Agreement. The

objective of a Concession Agreement shall be to secure value for public money and provide

efficient and cost effective services to the users. The concession agreement addresses the

issues like obligations between the principal parties, conditions, rights, concession fee,

revenue, representations and warranties, charges, dispute resolution, force majeure, and

termination etc. It also deals adequately with other important concerns such as user

protection; transparent and fair procedures; and financial support from the Government.

The concession (or project) agreement sets the stage for risk allocation for the

underlying project agreements. 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. During

the bid preparation and contract negotiations phase, it is crucial that there is a co-ordinate

approach towards finalising the project documents from the concession agreement down to

the construction contract and operation and maintenance agreement.

Therefore, the drafting of a concession agreement shall be done with a great care. Any

mismatch in risk allocation is most likely to result in adverse contractual (and monetary)

consequences for those parties who have not adequately priced in or managed those risks.

Hence in this chapter we would first discuss how a concession agreement has to be drafted for

a better execution of the project. Later a detailed study of concession agreements of two

different projects is done.

23

4.2 OVERVIEW OF THE FRAMEWORK

The highways sector in India is witnessing a significant interest from both

domestic as well as foreign investors following the policy initiatives taken by

the Government of India to promote Public Private Partnership (PPP) on

various models. However, the inflow of investment will depend on a

comprehensive policy and regulatory framework necessary for addressing the

complexities of PPP.

For sustaining private investment in up gradation and maintenance of the

Infrastructure projects on PPP basis, a precise policy and regulatory framework

is being spelt out in a Model Concession Agreement (MCA). This framework

addresses the issues which are typically important for limited recourse

financing of infrastructure projects, such as mitigation and unbundling of risks;

allocation of risks and rewards; symmetry of obligations between the principal

parties; precision and predictability of costs and obligations; reduction of

transaction costs; force majeure; and termination. It also deals adequately with

other important concerns such as user protection; transparent and fair

procedures; and financial support from the Government.

The MCA also elaborates on the basis for commercialising highways in a

planned and phased manner through optimal utilisation of resources on the one

hand and adoption of international best practices on the other. The objective is

to secure value for public money and provide efficient and cost effective

services to the users.

Rationale for phased development

The four critical elements that determine the financial viability of a

Highway project are traffic volumes, user fee, concession period and capital

costs. As the existing highways have dedicated traffic and the Government has

prescribed the user fee for uniform application across India, revenue streams

for a Highway project can be assessed with reasonable accuracy. The

Transformation

of the highways

sector is essential

A comprehensive

framework is a

prerequisite for

PPP

24

concession period, on the other hand, can be extended only marginally for

improving project viability as the growth of traffic would not permit unduly

long concession periods. In any case, the net present value (NPV) of projected

revenues after say, 15 years, is comparatively low from the Concessionaire’s

perspective.

As three of the four above-stated parameters are predetermined, capital

cost is the only variable that is available for the bidders to determine the

financial viability of a project, and they would seek an appropriate capital

grant/subsidy from the National Highways Authority of India (Authority) in

order to reduce the capital cost for arriving at an acceptable rate of return.

In the given scenario, higher the capital cost, greater would be the

compulsion of project sponsors to seek larger grants from the Authority. This,

in turn, would restrict the ability of the Government to leverage a larger pool of

extra budgetary resources, including private investment, and would hence

result in a curtailed programme of highway development.

In view of the foregoing, it is important to rely on cost effective designs

and to combine them with a phased investment programme to enable a more

efficient and sustainable programme of highway development.

The emphasis should be on phased development rather than on

providing high cost projects for catering to the projected growth in the long

term.

Where traffic intensity is comparatively low, limited expansion of

highways should be provided with further expansion after 7-12 years

depending on realistic projections of traffic growth. Up gradation of designs

and standards, construction of bypasses in urban and semi-urban areas and

other improvements may also be planned in phases depending on traffic

intensity. As an alternative, comparatively shorter concession periods may be

stipulated so that the Authority can augment the capacity when it is due. These

issues would be subjected to in-depth examination and reflected in a Manual of

Standards and Specifications that would form part of the standard documents

Phased developmentwill be affordableand cost-effective

25

associated with the MCA.

Technical parameters

Unlike the normal practice of focussing on construction specifications,

the technical parameters proposed in the MCA are based mainly on output

specifications, as these have a direct bearing on the level of service for users.

Only the core requirements of design, construction, operation and maintenance

of the Project are to be specified and enough room would be left for the

Concessionaire to innovate and add value.

In sum, the framework focuses on the ‘what’ rather than the ‘how’ in

relation to the delivery of services by the Concessionaire. This would provide

the requisite flexibility to the Concessionaire in evolving and adopting cost-

effective designs without compromising with the quality of service for the

users. Cost efficiencies would occur because the shift to output-based

specifications would provide the private sector with a greater opportunity to

innovate and optimise designs in a way normally denied to it under

conventional input-based procurement techniques.

Concession period

The guiding principle for determining project-specific

concession period is the carrying capacity of the respective

highway at the end of the concession period. As such, the

Concession Period is proposed to be determined on a project-

specific basis depending on the volume of present and

projected traffic.

Toll paying users should not be subjected to congested

highways and the Concession should, therefore, cease when

full capacity of the road is reached, unless further

augmentation is built into the MCA. The time required for

construction (about two years) has been included in the

Technical parameters willfocus on the level of service for the users

Concession period will be linked to projected traffic

26

concession period so as to incentivise early completion,

leading to maximisation of toll revenues.

Selection of Concessionaire

Selection of the Concessionaire will be based on open competitive

bidding. All project parameters such as the concession period, toll rates, price

indexation and technical parameters are to be clearly stated upfront, and short-

listed bidders will be required to specify only the amount of grant sought by

them. The bidder who seeks the lowest grant should win the contract. In

exceptional cases, instead of seeking a grant, a bidder may offer to share the

project revenues with the Authority.

Grant

It is proposed that based on competitive bidding, the Authority should

provide a capital grant of up to a maximum of 20 per cent of the project cost.

This would help in bridging the viability gap of the PPP projects. Where such

assistance is inadequate for making a project commercially viable, an

additional grant not exceeding 20 per cent of the project costs may be given

during the period following the commissioning of the Project.

Concession fee

Concession Fee will be a fixed sum of Re. 1 per annum for the first

nine years of the Concession Period. During the tenth year, the Concession Fee

will be equal to 1% of the project revenues and for each subsequent year, it

will increase by an additional 1%.

The rationale for the above fee structure is that in the initial years, debt

service obligations would entail substantial outflows. Over the years, however,

the Concessionaire will have an increasing surplus in his hand owing to the

declining debt service and rising revenues. Recognising this cash flow pattern,

Competitivebidding on singleparameter willbe the norm

Grants must befully leveraged

Concession fee should be levied when revenuestreams can sustain it

27

the Concession Fee to be paid by the Concessionaire will be on an ascending

revenue-sharing basis.

Risk allocation

As an underlying principle, risks have been allocated to the parties that

are best suited to manage them. Project risks have, therefore, been assigned to

the private sector, and to the extent it is capable of managing them. The

transfer of such risks and responsibilities to the private sector would increase

the scope of innovation leading to efficiencies in costs and services. The

commercial and technical risks relating to construction, operation and

maintenance are being allocated to the Concessionaire, as it is best suited to

manage them. Other commercial risks, such as the rate of growth of traffic, are

also being allocated to the Concessionaire. The traffic risk, however, is

significantly mitigated as the Project Highway is a natural monopoly where

existing traffic volumes can be measured with reasonable accuracy. On the

other hand, all direct and indirect political risks are being assigned to the

Authority.

It is generally recognised that economic growth will have a direct

influence on the growth of traffic and that the Concessionaire cannot in any

manner manage or control this growth rate. By way of risk mitigation, the

MCA provides for extension of the concession period in the event of a lower

than expected growth in traffic. Conversely, the concession period is proposed

to be reduced if the traffic growth exceeds the expected level.

The MCA provides for a target traffic growth and stipulates an increase of

up to 20% in the Concession Period if the growth rate is lower than projected.

Thus, a shortfall of 5% in the target traffic after 10 years will lead to extension

of the Concession Period by 7.5% thereof. On the other hand, an increase of

5% in the target traffic will reduce the Concession Period by 3.75% thereof.

Risk alleviation and mitigation is critical to private investment

28

Financial close

Unlike other agreements for private infrastructure projects which neither define

a time-frame for achieving financial close, nor specify the penal consequences

for failure to do so, the MCA stipulates a time limit of 180 days (extendable up

to another 120 days on payment of a penalty), failing which the bid security

shall be forfeited. By prevalent standards, this is a tight schedule, which is

achievable only if all the parameters are well defined and the requisite

preparatory work has been undertaken.

The MCA represents the comprehensive framework necessary for

enabling financial close within the stipulated period. Adherence to such time

schedules will usher in a significant reduction in costs besides providing the

over-due infrastructure. This approach would also address the present trend

where infrastructure projects do not achieve financial close for long periods.

User fee

A balanced and precise mechanism for fixation of user fee has been

specified for the entire Concession Period since this would be of fundamental

importance in determining the revenue streams of the project and, therefore, its

viability. The user fee shall be based on the rates to be notified by the

Government.

The MCA provides for indexation of the user fee to the extent of 40 per

cent thereof linked to WPI. Since repayment of domestic debt would be neutral

to inflation, the said indexation of 40 per cent is considered adequate. A higher

level of indexation is not favoured, as that would require the users to pay more

for a declining (more congested) level of service when they should be

receiving the benefit of a depreciated fee. A higher indexation would also add

to uncertainties in the financial projections of the project. At the time of second

phase, however, a one-time increase in toll rates would be allowed for

neutralising inflation occurring between project commencement and second

Project implementationmust commence as per agreed timeframe

User fee should bedetermined with great care and precision

29

phase. The above elements would be examined further and firmed up during

the proposed review of the toll policy.

Local traffic

It is proposed that the highways should be allowed to be used by local residents

without any payment of tolls (owing to the absence of an alternative road) until

free service lanes are provided. This would ensure local support for the project

and avoid any legal challenge or local opposition arising out of easement

rights. Frequent users should be entitled to discounted rates, in accordance with

the tolling policy.

Construction

Handing over possession of at least 80% of the required land

and obtaining of environmental clearances are being proposed

as conditions precedent to be satisfied by the Authority before

financial close.

The MCA defines the scope of the project with precision

and predictability in order to enable the Concessionaire to

determine his costs and obligations. Additional works may be

undertaken within a specified limit, only if the entire cost

thereof is borne by the Authority.

Before commencing the collection of user fee, the

Concessionaire will be required to subject the Project Highway

to specified tests for ensuring compliance with the

specifications relating to the level and safety of service for the

users.

Operation and maintenance

Captive local residents must be exempt from user charges

Quality and safety of service must be ensured

30

Operation and maintenance of the Project Highway is proposed to be

governed by strict standards with a view to ensuring a high level of service for

the users, and any violations thereof would attract stiff penalties. In sum,

operational performance would be the most important test of service delivery.

The MCA provides for an elaborate and dynamic mechanism to evaluate

and upgrade safety requirements on a continuing basis. The MCA also

provides for traffic regulation, police assistance, emergency medical services

and rescue operations.

Right of substitution

In the highways sector, the project assets do not constitute adequate security

for the lenders. It is the project revenue streams that constitute the mainstay of

their security. The lenders would, therefore, require assignment and

substitution rights so that the concession can be transferred to

another company in the event of failure of the Concessionaire

to operate the project successfully. The MCA accordingly

provides for such substitution rights.

Force Majeure

The MCA contains the requisite provisions for dealing with force majeure

events. In particular, it affords adequate protection to the Concessionaire

against political actions that may have a material adverse effect on the project.

Termination

In the event of termination, the MCA provides for a

compulsory buy-out by the Authority, as neither the

Concessionaire nor the lenders can use the highway in any

other manner for recovering their investments.

Termination payments have been quantified precisely as

compared to the complex formulations in most agreements

relating to private infrastructure projects. Political force

Maintenance standardswill be enforced strictly

Lenders will have the right of Substitution

Concessionaire will be protected against political

31

majeure and defaults by the Authority are proposed to Qualify

for adequate compensatory payments to the Concessionaire

and thus guard against any discriminatory or arbitrary action

by the Government or the Authority. Further, the project debt

would be fully protected by the Authority in the event of

termination, except for two situations, namely,

(a) when termination occurs as a result of default by the

Concessionaire, 90 per cent of the debt will be protected

(b) In the event of non-political force majeure such as Act of

God (normally covered by insurance), 90 per cent of the debt

beyond the insurance cover will be protected.

Monitoring and supervision

Day-to-day interaction between the Authority and the

Concessionaire has been kept to the bare minimum following a

‘hands-off’ approach, and the Authority shall be entitled to

intervene only in the event of default. Checks and balances

have, however, been provided for ensuring full accountability

of the Concessionaire.

Monitoring and supervision of construction, operation and

maintenance is proposed to be undertaken through an

Independent Engineer (a qualified firm) that will be selected by

the Authority through a transparent process. Its independence

would provide added comfort to all stakeholders, besides

improving the efficiency of project operations. If required, a

public sector consulting firm may discharge the functions of

the Independent Engineer.

The MCA provides for a transparent procedure to ensure

selection of well-reputed statutory auditors, as they would play

actions

Pre-determinedTermination payments should provide Predictability

A credible and fairarrangement forsupervision is essential

32

a critical role in ensuring financial discipline. As a safeguard,

the MCA also provides for appointment of additional or

concurrent auditors.

To provide enhanced security to the lenders and greater

stability to the project operations, all financial inflows and

outflows of the project are proposed to be routed through an

escrow account.

Support and guarantees by the Authority

By way of comfort to the lenders, a loan assistance from

the Authority has been stipulated for supporting debt service

obligations in the event of a revenue shortfall resulting from

political force majeure or default by the Authority.

Guarantees have also been provided to protect the

Concessionaire from construction of competing roads, which

can upset the revenue streams of the project. Additional toll

ways would be allowed, but only after a specified period and

upon compensation to the Concessionaire by way of an

extended concession period and reduced concession fee.

Miscellaneous

A regular traffic census and annual survey has been

stipulated for keeping track of traffic growth. Sample checks

by the Authority have also been provided for. As a safeguard

against leakage of revenue share, a floor level in present and

projected traffic has also been stipulated.

The MCA also addresses issues relating to dispute

resolution, suspension of rights, change in law, insurance,

defects liability, and indemnity, redressal of public grievances

and disclosure of project documents.

Support and guaranteesby the Authority are essential

An effective disputeresolution mechanism iscritical

33

Conclusion

Together with the Schedules, the proposed framework

addresses the issues that are likely to arise in financing of

highway projects on BOT basis. The proposed regulatory and

policy framework contained in the MCA is critical for attracting

private investment with improved efficiencies and reduced

costs, aimed at accelerating growth.

Private participationshould improveefficiencies and reduce costs

34

4.3 Case Study: HYDERABAD INTERNATIONAL AIRPORT LIMITED

Project: Development, Construction, Operation and Maintenance of the Hyderabad

International Airport

Location: Shamshabad, Andhra Pradesh, India

Client: Ministry of civil aviation, Government of India.

Consortium: GMR-Hyderabad International Airport Limited (GHIAL) is a joint venture

company promoted by GMR Group (63%) with Malaysia Airports Holding Berhad (MAHB)

(11%), Government of Andhra Pradesh (13%) and the Airports Authority of India (13%) as

the other consortium partners. GHIAL won the bid to develop and operate the Greenfield

international airport at Shamshabad in Hyderabad through an international competitive

bidding process conducted by the Government of Andhra Pradesh and the Government of

India in 2003.

Concession Period: 30 years from the date of commencement of the operation on extension

basis

EPC Contract: The main EPC contractors were Larsen & Toubro for airside and landside

works, and China State Construction & Engineering (Hong Kong) for the construction of the

passenger terminal building and the ATC Tower. Menzies Aviation Plc was chosen for the

development and operation of cargo facilities. The in-flight catering contract was awarded to

LSG Sky Chef and Sky Gourmet.

Total project cost: Rs. 2478 crores

Consultancy services: COWI A/S, in association with Aviaplan of Norway and STUP of

India, provided consulting services for preparing the master plan, engineering / architectural

design and tender documents for the construction of the new airport.

Completion Period: Within 36 months from the date of commencement of work (Phase I)

35

The detailed overview of the concession agreement is as follows.

This agreement is made in New Delhi on 20th day of December 2004 between the president

of India, acting through the secretary, ministry of civil aviation of government of India and

Hyderabad international airport limited, a joint sector company established for the purpose of

implementing the project. It is the endeavor of the parties to develop an international standard

airport where all airport activities are carried out in a timely manner with requisite

performance standards.

In the context of a project being undertaken through a public/private sector approach, it is

critical that the terms and conditions upon which such a project will be implemented are set

out and therefore the parties enter into this concession agreement.

Definitions and Interpretations

The agreement starts with definitions and interpretations wherein the terms that are followed

in the next part of the agreement are well explained and abbreviations are expanded,

providing clarity and avoiding ambiguity. The definitions given here are applicable to the

whole agreement except to the extent that the context otherwise requires.

Scope of the project

The concession agreement defines the scope of the project to the point clearly covering every

detail though in a brief way.

The scope of the Project:

The development and construction of the Airport on the Site in accordance with the

provisions of the Agreement;

The operation and maintenance of the Airport and performance of the Airport Activities

and Non-Airport Activities in accordance with the provisions of the Agreement

The performance and fulfillment of all other obligations of HIAL in accordance with the

provisions of the Agreement

36

Grant of Concession

This is a clause whereby the Government of India grants HIAL the exclusive right and

privilege to carry out the development, design, financing, construction, commissioning,

maintenance, operation and management of the Airport subject to and in accordance with the

provisions of this Agreement and Applicable Law.

Recognition of Rights

The rights of the HIAL are defined as follows:

(a) Any activity or business related or ancillary to the activities referred

In the concession or which HIAL considers desirable or appropriate to be carried on or

engaged in connection therewith

(b) Any activity or business in connection with or related to the arrival, departure and/or

handling of aircraft, passengers, baggage, cargo and/or mail at the Airport; and

(c) Any activity or business in connection with or related to the development of the Site or

operation of the Airport to generate revenues including the development of commercial

ventures such as hotels, restaurants, conference venues, meeting facilities, business centres,

trade fairs, real estate, theme parks, amusement arcades, golf courses and other sports and/or

entertainment facilities, banks and exchanges and shopping malls.

The agreement also permits HIAL to give service provider rights for carrying out few

activities and businesses to any person subject to such terms and conditions as HIAL may

determine are reasonably appropriate, subject to the same being within the framework of this

Agreement and not being contrary to the terms and conditions of this Agreement provided

that, if and to the extent required by any Applicable Law

Concession Fee

The Parties agree that HIAL shall, in consideration for the grant by GoI of the Concession to

pay to GoI a fee amounting to four per cent (4%) of Gross Revenue annually on the terms

specified in this Article

The concession fee clause clearly defines each and every part of the concession fee explaining

the meaning of every term and what it actually covers. It explains gross revenue and what all

37

it consists of, the time of payment, payment account nad provisional payment, interest and

taxes etc.

Conditions precedent

It says that the provisions of this Agreement shall take effect and become binding on the

Parties from the date upon which the following conditions precedent are satisfied in full:

Amendments to the Aircraft Rules, 1937;

The receipt by GoI of irrevocable notice from HIAL and its Lenders that Financial

Close has occurred which notice shall be final and binding on the Parties

The clause also explains Obligations to Satisfy Conditions Precedent.

About the Non-fulfilment of Conditions Precedent the agreement says that if the condition

precedent set out has not been satisfied in full or not been waived by the date falling twelve

(12) months after the date of this Agreement, HIAL or GoI shall have the right to terminate

this Agreement by giving twenty-one (21) days' notice in writing to the other Party and upon

expiry of such notice this Agreement shall terminate without any consequent cost or

consequence upon either Party.

At any time prior to the date specified, the Parties shall, by mutual agreement in writing, have

the right to extend the date for satisfaction or waiver of the conditions precedent by such

period as the Parties may agree.

Obligations Of Goi

The obligations of the government are clearly defined in this clause as follows:

GoI shall, at its own cost and expense undertakes, comply with and perform all its

obligations set out in this Agreement and shall not instruct any statutory body under the

direct control and direction of the Ministry of Civil Aviation to take any action that would

constitute a breach of this Agreement if such body were party to this Agreement in place

of GoI.

GoI shall limit its responsibilities to the permissions within its domain and not take any

responsibility for the permission within the domain of Govt. of Andhra Pradesh.

38

No new or existing airport shall be permitted by GoI to be developed as, or improved or

upgraded into, an International Airport within an aerial distance of 150 kilometres of the

Airport before the twenty-fifth anniversary of the Airport Opening Date.

Post commencement of operations of the Airport GoI shall not act, or omit to act, in a

manner which discriminates against the Airport or HIAL in a way that provides other

Major Airports with an unfair competitive advantage when compared to the Airport or

HIAL, as the case may be.

From and with effect from the date on which Airport Opening occurs GoI will ensure that

the Existing Airport shall not be open or available for use for civil aviation operations.

that neither HIAL nor GoI shall be responsible for or made to account for such costs,

expenses, liabilities, loss of profit and/or claims made by third parties in connection with

or pursuant to such closure.

Representations and Warranties

In this clause, each Party represents and warrants to the other Party that it has the power

and authority to validly execute and deliver this Agreement and it is subject to the laws of

India during the term of this Agreement. Many such warranties and representations are

given by both the parties and some additions warranties are given by HIAL to GoI about

the shares and shareholding pattern of HIAL.

With regard to the representation and warranties made by either party, each party

undertakes to disclose to the other party any alteration/ change in the Representation and

Warranties made within a period of seven days of the occurrence of such change/

alteration. This disclosure by the parties shall be without prejudice to their respective rights

and contention. The lock-in restrictions to which the shareholding of Sponsors and State

Promoters are subject to are also given.

HIAL shall at all times obtain and maintain all Clearances and Approvals, including

registrations, licenses and permits (including immigration, temporary residence, work and

exit permits), which are required by Applicable Law for the performance of the Project.

DISCLAIMER: HIAL acknowledges that prior to the execution of this Agreement, it has,

after a complete and careful examination, made an independent evaluation of the Scope of

39

the Project and has determined the nature and extent of the difficulties, risks and hazards

that are likely to arise or may be faced by it in the course of the performance of its

obligations in this Agreement. HIAL acknowledges and hereby accepts the difficulties,

risks and hazards associated with the Scope of the Project and hereby agrees that GoI shall

not be liable for the same in any manner whatsoever to HIAL.

For the avoidance of doubt the difficulties, risks and hazards accepted by HIAL shall

exclude any obligations for which GoI is responsible pursuant to the terms of this

Agreement.

Construction Of The Airport

The clause states the following:

HIAL shall review the Master Plan every five years

HIAL shall design, procure, construct, complete, test and commission the Initial Phase,

and remedy any defects in respect thereof, in accordance with the Master Plan, Good

Industry Practice and Applicable Law. HIAL shall ensure that the Works shall conform

with the Specifications and Good Industry Practice.

HIAL will organize the Site during the period of construction with regard to safety

precautions, fire protection, security, transportation, delivery of goods, materials, plant

and equipment, control of pollution, maintenance of competent personnel and labour and

industrial relations and general site services including, without limitation, access to and on

the Site, allocation of space for contractors' and sub-contractors' offices and compounds

and the restriction of access to the Site to authorised Persons only.

HIAL will ensure that the Works will comprise only materials and goods which are of

sound and merchantable quality and which are manufactured and prepared in accordance

with Applicable Law and that all workmanship shall be in accordance with Applicable

Law and with Good Industry Practice applicable at the time of construction and/or

installation.

40

Airport Operation and Maintenance

This clause says that HIAL shall at all times comply with Applicable Law in the operation

and maintenance of the Airport and will operate, maintain, keep in good operating repair

and condition in accordance with Good Industry Practice and, in accordance with the

Standards and renew, replace and upgrade to the extent reasonably necessary, the Airport

which for these purposes shall exclude any systems or equipment to be operated and

maintained by AAI in accordance with the terms of the Communication Navigation

Surveillance/ Air Traffic Management Agreement. All maintenance, repair and other

works shall be carried out in such a way as to minimize inconvenience to users of the

Airport.

In order to assist HIAL and GoI achieve their objectives under this Agreement a joint

coordination committee shall be formed comprising HIAL, GoI, GoAP and the other

Relevant Authorities providing the Reserved Activities.

The Parties wish to develop and operate the Airport to standards consistent with those

achieved at other leading international airports and in this regard, customs, immigration

and quarantine procedures shall be established by GoI, at its own cost.

GoI and HIAL after mutual discussions may enter into arrangements to jointly provide

aviation security services at the Airport.

GoI confirms that it shall provide meteorological services at the Airport in accordance

with the practices established or recommended from time to time pursuant to the Chicago

Convention and on the same terms as it provides such services at all other Major Airports.

Subject to any law, regulation or international treaty obligations as in force from time to

time, GoI shall follow a policy of non-discrimination with regard to the classes or

descriptions of air traffic that are permitted to use the Airport and subject to regulation by

Regulatory Authority or under Independent Regulatory Legislation, shall not impose

limitations on aircraft movements at the Airport or otherwise restrict the capacity at the

Airport.

The clause says that HIAL shall keep the Airport open at all times for the take-off and

landing of aircraft unless and so long as HIAL is unable to do so as a result of a failure by

any Relevant Authority to provide a Reserved Activity and it shall be responsible for, and

41

promptly pay, all expenses incurred by it in respect of the operation of the Airport

including, without limitation, in respect of Tax, insurance and the provision of all services

or utilities to or at the Airport such as electricity, water, gas, refuse collection, sewerage,

foul water, drainage and telephone.

If following the Airport Opening Date, HIAL ceases or substantially ceases the operation

of the Airport for more than forty-eight hours, other than in accordance with its rights

under this Agreement and not being due to GoI or any Relevant Authority, without the

written consent of GoI, at the request of either Party GoI will meet with HIAL to discuss

and agree a plan and the appointment of a joint operation and management committee, to

procure that operation of the Airport recommences as soon as practicable.

Charges

This clause details about the parties having right to impose charges, what the airport charges

consist of and payment of taxes.

Subject to Applicable Law, no Person other than HIAL, any Service Provider Right

Holder granted a relevant Service Provider Right or the AAI may impose any charge or

fee (a) in respect of the provision at the Airport of any facilities and/or services which are

included within Airport Activities or (b) in respect of the movement of passenger, or

vehicular traffic on the Airport or the Site.

The Airport Charges shall be consistent with ICAO Policies.

The Regulated Charges set out in Schedule 6 shall be the indicative charges at the Airport.

Prior to Airport Opening HIAL shall seek approval from the Ministry of Civil Aviation

for the Regulated Charges, which shall be based on the final audited Project cost.

If at any time prior to the date the IRA has the power to approve the Regulated Charges

HIAL wishes to amend such charges it shall seek consent from the Ministry of Civil

Aviation for such amendments.

HIAL and/or Service Provider Right Holders shall be free without any restriction to

determine the charges to be imposed in respect of the facilities and services provided at

the Airport or on the Site, other than the facilities and services in respect of which

Regulated Charges are levied.

42

All Taxes as may be due and payable by HIAL pursuant to Applicable Law, shall be paid

on a priority basis prior to any disbursements by HIAL to any party including Lenders.

Maintenance of Insurance

HIAL shall effect and maintain at its own cost, at all times the insurances required under

the Financing Agreements and such additional insurances, as HIAL may reasonably

consider necessary or prudent in accordance with Good Industry Practice.

HIAL shall furnish to GoI, copies of such policy certificates, copies of the insurance

policies and evidence that the insurance premia have been paid in respect of such

insurance. No insurance shall be cancelled, modified or allowed to expire or lapse until the

expiration of at least forty-five days notice of such cancellation, modification or non-

renewal has been provided by HIAL to GoI.

If HIAL fails to effect and keep in force all insurances for which it is responsible pursuant

hereto, GoI shall have the option to keep in force any such insurance, and pay such premia

and recover the costs thereof from HIAL.

Accounts and Audit

The clause says that HIAL shall maintain books of accounts recording its income and

expenditure, receipts and payments, and assets and liabilities, in accordance with Applicable

Law. It shall provide to GoI two copies of its Balance Sheet and Profit and Loss Account

along with a report thereon by its Statutory Auditors, as soon as reasonably available.

Force Majeure

This clause shall apply if the performance by any Party of its obligations under this

Agreement is prevented, hindered or delayed in whole or in part by reason of Force Majeure.

The clause says that neither Party shall be liable for any failure to comply, or delay in

complying, with any obligation under or pursuant to this Agreement and they shall not be

required to perform their obligations to the extent that the performance by either Party of

its obligations under this Agreement is prevented, hindered, impeded or delayed in whole

43

or in part by reason of Force Majeure and in particular, but without limitation, the time

allowed for the performance of any such obligations shall be extended accordingly.

As soon as reasonably practicable but not more than 72 hours following the date of

commencement of any event of Force Majeure, if either Party desires to invoke such event

of Force Majeure as a cause for delay or failure in the performance of any obligation

hereunder, it shall notify the other Party in writing of such date and the nature and

expected duration of such event of Force Majeure. Within a reasonable time following the

date of such notice of such event of Force Majeure, the Party having invoked such event of

Force Majeure as a cause for such delay shall submit to the other Party sufficient proof of

the nature of such delay or failure and its anticipated effect upon the time for performance.

The Affected Party shall take all reasonable steps to prevent, reduce to a minimum and

mitigate the effect of the event of Force Majeure.

The clause also speaks about the default i.e., HIAL default events, GoI Default Events,

consequences of default. The default may also lead to termination according to the terms

given in the clause. The clause clearly explains when GoI and HIAL can terminate the

contract

Liability and Indemnity

This clause explains about the liability of HIAL and GoI and compensation payable and limit.

HIAL alone will bear any responsibility there may be for any cost, expense, loss, liability

or damage suffered for incurred by any user(s) at the Airport or any other Person(s) or

otherwise and arising out of or in connection with the design, construction, maintenance

and operation of the Airport and Non-Airport Neither GoI nor HIAL shall be liable for

any special, indirect, incidental or consequential damages arising out of or in connection

with this Concession Agreement.

GoI and HIAL will be obliged to give information to the other party, if any legal

proceeding is initiated in any court or tribunal against them relating to this Concession

Agreement.

If as a result of Change in Law, HIAL suffers an increase in costs or reduction in net after tax

return or other financial burden, loss, liability or damage in connection with its development

44

or operation of the Airport, the aggregate financial effect of which exceeds Rupees ten million

in any financial year, HIAL may notify GoI and propose amendments to this Agreement so as

to put HIAL in the same financial position as it would have occupied had there been no such

Change in Law resulting in such cost increase, reduction in return or other financial burden,

loss, liability or damage as aforesaid.

HIAL shall in the first instance and in accordance with Applicable Law, take all reasonable

steps including, to the extent feasible, an increase in the charge to be levied on users of

Airport to mitigate the adverse effect of a Change in Law.

Dispute Resolution

This clause describes negotiation, conciliation and reference to arbitrator. The parties shall

use their own respective reasonable endeavors to settle any dispute. Any Dispute which the

Parties are unable to resolve within a period (as the Parties may agree) of the written

notification by one Party to the other of the existence of a Dispute shall be finally determined

by arbitration in accordance with the Indian Arbitration and Conciliation Act, 1996 and in

accordance with the UNCITRAL rules (the "Rules") by three arbitrators appointed in

accordance with the Rules. Any decision or award of an arbitral tribunal appointed shall be

final and binding upon the Parties.

Partial Invalidity

If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable

in any respect under any law of any jurisdiction, neither the legality, validity or enforceability

of the remaining provisions nor the legality, validity or enforceability of such provision under

the law of any other jurisdiction will, in any way, be affected or impaired and the legality,

validity and enforceability of the remainder of this Agreement shall not be affected.

No Partnership

No Party shall have any authority, unless expressly conferred in writing by virtue of this

Agreement or otherwise and not revoked to bind any other Party as its agent or otherwise.

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Time is of the Essence

Time shall be of the essence of this Agreement, both as regards the dates, periods or times of

day mentioned which may be substituted for them in accordance with this Agreement.

Computation of Time

Times referred to in this Agreement are times in Hyderabad, India. In computing any period

of time prescribed or allowed under this Agreement, the day of the act, event or default from

which the designated period of time begins to run shall be included. If the last day of the

period so computed is not a Business Day, then the period shall run until the end of the next

Business Day.

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4.4 Case Study: JAIPUR - KISHANGARH EXPRESSWAY

Project: Strengthening the existing two lanes and widening it to six lanes in the Jaipur

Kishangarh stretch of NH-8

Client: National Highway Authority of India (NHAI)

Consortium: The consortium is formed by the GVK group and B.Seenaiah and company

(Projects) Ltd (BSCPL) known as GVK Jaipur Kishangarh Expressway Private Limited

(GVK) which is a Special Purpose Vehicle (SPV). The Consortium won the bid and had

signed the Concession Agreement (CA) with NHAI on May 8, 2002 for the development and

implementation of the Project. L&T later joined the Consortium.

Concession Period: 20 years including the construction period of 30 months.

EPC Contract: GVK entered into EPC agreement with M/s Larsen & Toubro Limited- ECC

division for the stretch KM 273.5 to KM 313.5 and M/s Seenaiah & Company (Projects)

Limited for the stretch KM 313.5 to KM 363.9.

The EPC contract was a fixed time fixed price contract.

GVK has decided to carry out O&M function on its own.

Total project cost: Rs.615 crore funded by

Rs.101 crore Equity,

Rs.211 crore Equity support grant from NHAI

Rs.302 crore debt.

The total cost of the EPC contract given to L&T Limited ECC division was Rs.296 crore

while the cost of the contract awarded to BSCPL was Rs.239crore.

Financial Advisor: IDFC, which also acted as the arranger for the entire debt.

The project achieved financial closure on March 17, 2003 with IDFC having sanctioned the

entire debt. Subsequently, a part of the debt component amounting to Rs.193 crore was picked

up by a consortium of 8 banks.

Completion Period: For both the contracts (L&T and BSCPL) it was 24 months ending 28th

March 2005, much ahead of SPCD of 14th September, 2005.

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Detailed study of the concession agreement of Jaipur - Kishangarh Expressway

Scope of Project

The consortium has been given limited liability to enter into the concession agreement in

agreement to the LOA for undertaking the design, engineering, financing, procurement,

construction, operation and maintenance of the project highway which shall include

strengthening of the existing two lanes of NH-8 from Km. 273/500 to Km. 366/200, six lanng

thereof in accordance with the specifications and standards.

Definitions and interpretations

The agreement defines all the terms that are used in this agreement whose meaning remains

the same throughout until stated specifically at any other part of the agreement.

Conditions Precedent

The concessionaire has to obtain all the permits for a certain period of time from the state and

central government, after which it shall be granted way leaves required in connection to

project such as right of way for alignment and permissions to enter and utilize the site for the

construction as stated in the agreement. The concessionaire has to provide all the financial

documents, the EPC contract, O&M Contract, Tolling contract, performance security, copies

of the resolution system adopted by the board of directors etc. to NHAI.

Performance Security

A performance security of Rs.100 million has to be paid to NHAI within 120 days failing

which, the NHAI is entitled to terminate the agreement. If the concessionaire is in breach of

this agreement, the client has the right to hold the performance guarantee till the Commercial

Operation Date or till the breach is cured. An Escrow account has to be created by the

concessionaire within 60 days from the date of signing this agreement, which shall contain all

inflows and outflows of cash on account of capital and revenue receipts and expenditures,

funds constituting the financing package, fees collected by concessionaire during operation

period, fees collected by NHAI in exercise of its rights shall be deposited in the account.

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Obligations of the Concessionaire

The concessionaire shall submit the project completion schedules, scheduled completion

date, design and engineering before starting the construction and the project documents within

seven days of their execution and shall not make any replacements or amendments without

prior notice to NHAI. If any replacements have to be made, a 30 days prior notice to NHAI

shall be given. The concessionaire has to promptly remove all the surplus construction and

wastes from the project site for neat construction. It has to provide a regular report of the

progress of work to NHAI. It has to also acquire any real estate which shall be used for

additional facilities in the project site.

Obligations of NHAI

NHAI shall give the concessionaire the right to access the site without any encumbrances,

provide facilities like water, electricity etc, to assist the concessionaire in obtaining necessary

permissions at the cost of concessionaire and to regulate the traffic. It even allows the

concessionaire to conduct any tests on the highway without causing any problem to the traffic

prior to the start of the project.

Independent Consultant

NHAI shall appoint an independent consultant initially for a period of four years and the

appointment shall be given within 120 days from the date of agreement. NHAI may terminate

the appointment of the Independent Consultant at any time subject to appointment of their

replacement by another Independent Consultant. If the concessionaire finds that the

independent consultant is not fair in his duties or is not efficient, it can make a written

representation to NHAI. First the concessionaire and the consultant are called for a meeting

by the NHAI to resolve the dispute amicably. If the dispute is not solved by this way, it shall

be resolved in accordance with the dispute resolution procedure.

Monitoring and supervision of construction

Proper monitoring of the quality of work is done frequently by testing the work whenever

required by the independent consultant. If the project completes with small items of work yet

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pending, the concessionaire shall ask the consultant to issue a provisional certificate along

with a list which shall contain the list of all works yet to be completed (punch list). Then the

concessionaire along with payment for damage of Rs. 200,000 shall be given a period of 120

days. If the NHAI is not satisfied with the results of the tests conducted, it shall not issue the

completion certificate. It shall notify the concessionaire within7 days and the concessionaire

shall take respective measures to correct the damages after which the completion certificate

shall be issued.

If at all the progress of the work was observed to be slow an immediate notice from NHAI

was given to the concessionaire and the concessionaire was required to inform within 15 days

what steps would be taken by it to expedite the progress. If the Concessionaire fails to achieve

any Project milestone other than Project Completion, within a period of 90 (ninety) days from

the date set forth, then it shall pay Damages to NHAI at the rate of Rs.1,000,000 (Rs. One

million) per day until such milestone is achieved.

If the suspension of project is caused by

Any reason other than default or breach of the Agreement by the Concessionaire including

breach of any of the obligations of the Concessionaire under this Agreement, the

Preservation Costs shall be borne by NHAI;

Reason of default or breach of this Agreement by NHAI the Preservation Costs shall be

borne by NHAI; or

Reason of any Force Majeure Event, the Preservation Costs shall be borne by the

Concessionaire save and except to the extent otherwise expressly provided in force

majeure clause

Completion

The Completion certificate to the concessionaire shall be given when the project is complete

and is open to the traffic until which the concessionaire shall not be entitled to levy or collect

any fee. If the project shall not be completed by the scheduled date the concessionaire shall

pay an amount of 0.01% of the total project cost per week and if this exceeds 12 months from

the scheduled date then NHAI shall be entitled to terminate this agreement.

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Change of Scope

Any additional work to be performed by the concessionaire shall be informed by the NHAI in

a written document known as “Change of Scope Order”. The concessionaire can accept the

additional only if it does not exceed 5% of the total project cost and if it does not adversely

affect the Commercial Operation Stage.

Operation and Maintenance

The Operation and Maintenance of the Highway shall be done by the concessionaire or by

its O&M contractor so that safe, smooth and uninterrupted flow of traffic can be ensured

and the tolls and fees can be collected. The O&M contractor shall even maintain the

highway by resurfacing the pavements, repairing the structures, horticulture, extension of

any existing pavements, bridges etc.

It even shall have the responsibility to maintain a public relations unit to interface with and

attend to suggestions from users, media, government agencies etc. During the operation

period the concessionaire shall not carry out any material change unless it is required to

operate the highway with the standard specifications.

The concessionaire shall not close any lane of the project highway for undertaking

maintenance or repair works except with prior written approval of the NHAI. The

concessionaire shall seek the approval at least seven days before the scheduled date of

close of the highway.

NHAI shall grant permission for the above within 5 days of the receipt of the request. The

concessionaire shall reopen the lane within the stipulated time mentioned in the

permission. For any delay caused by the concessionaire in reopening the lane, it shall be

charged at Rs. 10,000 per day for every 100m stretch until the stretch is been re-opened for

traffic.

The consultant shall inspect the work of the concessionaire every month and prepare an

O&M inspection report which shall be submitted to both the parties. The concessionaire

within 30 days of the receipt of this report, shall modify the defects and shall resubmit its

report to NHAI once in every fortnight.

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Force Majeure

Force majeure events are classified as three different types in this agreement. They are :

Non Political Force Majeure Events (floods, lightning, earthquake, cyclone, volcanic

eruption or fire, radioactive contamination, strikes or boycotts other than those by the

contractor or concessionaire). In such a case the parties shall bear their respective costs.

Indirect Political Force Majeure Events (war, invasion, armed conflict, blockade, industry

wide or state wide or country wide strikes, any public agitation which prevents collection

of fees for more than 7 days continuously in an accounting year). In this case the

concessionaire shall bear the cost directly related to project if that is to the extent of

insurance claims, else one half of the same shall be reimbursed by the NHAI.

Political Force Majeure Events (change in law, expropriation or compulsory acquisition

etc.). In this case the force majeure cost shall be reimbursed by the NHAI only if the

concession period is not extended.

If a force majeure event occurs before Financial Close there shall not be any termination

unless such a situation extends to 180 days of 365 days and the date of the financial close

shall be extended by the period for which such force majeure event shall exist. Each party

shall bare its own cost.

If a force majeure event occurs after the financial close and before COD, the concession

period shall be extended to a period till which the force measure subsists. If such a situation

arises after the COD, The concessionaire shall try to collect the fees from the users but if it

fails to do so the concession period shall be extended by the period for which the collection of

fees remains suspended. For avoidance of doubt, Force Majeure Costs shall not include loss

of Fee revenues or any debt repayment obligations but shall include interest payments on such

debt, O&M Expenses and all other costs directly attributable to the Force Majeure Event.

Termination of the agreement is done if the force majeure occurs for more than 180 days

continuously. In such a case the payments are made as follows.

If the Termination is on account of a Non Political Event, the Concessionaire shall be

entitled to receive from NHAI by way of Termination Payment an amount equal to 90% of

the Debt Due and the entire Subordinated Debt less due insurance claims, if any.

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If the termination is on account of a Indirect Political Event, the concessionaire shall be

entitled to receive the total debt less due insurance claims, outstanding subordinated debt,

110% of the equity spent on the project

If the termination is on account of a direct political event, The concessionaire shall be

entitled to receive total debt due, 120% of the subordinated debt and 150% of the equity.

In such a event if the parties are unable to agree in good faith about the occurrence of a force

majeure, such a dispute shall be settled by following the dispute resolution procedure. No

party is liable to other party in respect of any loss, damage, cost expense, claims that may

arise out of such force majeure. The affected party cannot claim for any payment during such

an event except if it has informed in writing to the other party regarding such an event within

7 days after it knew about the event. The affected party is excused for not performing its

obligations only if it makes reasonable efforts to mitigate the limit of damage to the other

party. If the affected party is able to resume from its obligations it should give a written

notice stating that affect and then can resume from its performance.

If the concessionaire is in a material breach and if it has cured it before termination, then the

concessionaire has to pay to the NHAI compensation equal to all the direct additional costs

incurred by NHAI in one lumpsum or in 3 equal semi-annual installments with an interest of

2%.

Termination

Termination of the agreement can take place

If the concessionaire fails to achieve Financial Close

If the concessionaire fails to achieve any project mile stones other than Scheduled Project

Completion Date within the set date and fail to cure it in a period of 180 days from the date

of its occurrence.

If the concessionaire is in Material Breach

If the shareholding of the consortium members falls below the minimum prescribed

If the concessionaire is adjudged bankrupt or insolvent

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The concessionaire may give a written notice of termination to NHAI if

NHAI is in breach of this Agreement and such breach has a Material Adverse Effect on the

Concessionaire and NHAI has failed to cure such breach or take effective steps for curing

such breach within 90 (ninety) days of receipt of notice in this behalf from the

Concessionaire;

NHAI repudiates this Agreement or otherwise evidences an irrevocable intention not to be

bound by this Agreement;

GOI or GOR or any Governmental Agency have by an act of commission or omission

created circumstances that have a Material Adverse Effect on the performance of its

obligations by the Concessionaire and have failed to cure the same within 90 (ninety) days

of receipt of notice by NHAI in this behalf from the Concessionaire;

NHAI has delayed any payment that has fallen due under this Agreement if such delay

exceeds 90 (ninety) days.

If the Concessionaire terminates the agreement because of an NHAI event of default, it is

entitled to receive from NHAI

The total debt due

120% of the total subordinated due

150% of the equity

These payments have to be paid within 30 days of a demand made by the concessionaire.

Such payments have to be made by way of credit to the Escrow account.

Defects and Liabilities

The first inspection of the project highway and all project facilities shall be done between 30

and 36 months prior to the expiry of the concession period. Within 90 days from the initial

inspection a report is submitted to independent consultant and any renewal works shall be

done. The second inspection shall be done between 9 months and 12 months prior to the

expiry of the concession period. Within 30 days after the completion of the inspection a report

shall be submitted to the independent consultant after which if any renewals to be done shall

be made.

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Change in Law

If there is any change in law due to which the concessionaire suffers a financial burden which

exceeds Rs. 10 million, then it shall notify NHAI and propose amendments in the agreement

so as to maintain its financial position and vice versa.

Dispute Resolution

If there is a chance of a dispute to arise between the two parties, it is first informed to the

independent consultant who tries to solve the dispute in a amicable manner. If still the dispute

is not solved the chairman of the board of directors of NHAI tries to settle down the dispute.

If still the parties are not happy with the solution, the dispute is taken to the notice of the

arbitration board which consists of three members of which two are appointed by the parties

individually and the third arbitrator shall be appointed

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Chapter 5

RISK MITIGATION

5.1 OBSERVATIONS

The framework involved in the concession agreement addresses issues which are

typically important for limited resource financial of infrastructure projects, such as mitigation

and unbundling of risks, allocation of risks and rewards, symmetry of obligations between the

principal parties, precision and predictability of cost and obligations, reduction of transaction

cost, force majeure and termination. It also deals with other concerns such as user protection,

transparent and fair procedures and financial support from the government.

The concession agreement allocates risks to the best party suited to manage them as

against the earlier policy of the concessionaire bearing the maximum risk. While the technical

and commercial risks are still assigned to the concessionaire, the direct and indirect risks are

borne by the government authority. The concession agreement specifies technical parameters

for construction, revenue-sharing agreements between the government and the concessionaire,

concession period, tolling mechanism, etc. It also states that detail design studies are to be

undertaken by the concessionaire based on the core requirements given by the NHAI. Land

and environmental clearances continue to be provided by the government. Other

responsibilities of the government include compulsory buyout in case of contract termination;

compensatory payments to concessionaire in case of force majeure situations; default by the

NHAI or in the event of an additional tollway/competing road etc.

One of the key features of this concession agreement is that the risks have been

allocated to the party best suited to handle them as risk alleviation and mitigation is

considered to be critical for private investment. Project risks have been assigned to the private

sector to the extent it is capable of managing them. The transfer of these risks is expected to

result in innovations and efficiencies in costs and services. The commercial, technical and

traffic risks are also assigned to the concessionaire. All direct and indirect political risks are

allocated to the authority/government.

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Some of the key features include protection against force majeure events, compulsory

buy-out by the government in case of termination, minimum interaction between the

government and concessionaire, monitoring vision to be done by an independent engineer, all

financial flows to be routed through an escrow account to provide security to lenders and

greater stability to project operations, stipulation of a regular traffic census and annual survey

for keeping track of traffic growth etc.

5.2 STUDY OF PROVISIONS FOR RISK MITIGATION IN THE AGREEMENTS

The concession agreement has provisions for risk mitigation in various clauses. It

allocates risk to the party that is best suitable to handle that risk. After a detailed study of the

concession agreements the following provisions in the concession agreement for risk

mitigation have been observed:

The concession agreement clearly specifies and defines the rights of the either party thus

avoiding risks of conflict and interference between the parties. It clearly defines the right

of each party thus allocating particular rights to one party which can handle, for example

land acquisition to private party avoiding political risks etc.

It clearly specifies the obligations of both the parties and clearly defines the

responsibilities each party is limited to. The obligations are so designed that a symmetry is

maintained in the obligations between the parties

In the agreement, each Party represents and warrants to the other Party that it has the

power and authority to validly execute and deliver this Agreement and it is subject to the

laws of India during the term of this Agreement avoiding legal risks.

To cater for the design risk, it has provisions which clearly impose the damage on the

party which causes the damage

The concession agreement states the default of both the parties in detail and mentions the

remedies and consequences of the defaults which covers the construction risk

Clauses on insurance are well designed to cater for the environmental damage and

reduction of construction risk

The clause on force majeure gives protection against the force majeure risks

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There are clauses which cater for the operations and maintenance risks such as cases when

operating costs exceed the original estimates or when completed facility cannot be

effectively operated or maintained to produce the expected capacity, output or efficiency

Exchange rate risk and interest rate risk are reduced by clearly mentioning the currency

exchange

5.3 RECOMMENDATIONS FOR RISK MITIGATION THROUGH CONCESSION

AGREEMENT:

The documentation in relation to the project should be such so as to enable passage of

various risks that are not within the control of Special Purpose Vehicle but it has been

allocated to it under the main concession or license. The developer should not be straddled

between the various documents with risks it has no control over or is not capable of

absorbing. Thus, the risks allotted under the concession or license should flow down to the

various contractors under the relevant documentation with the contractors

Concession agreements need to be more transparent and inclusive of public acceptance for

the success of the project for the satisfaction of the end users.

The documents incorporating the risk sharing framework enable the investor to evaluate

the risks and decide whether and how to participate in the bidding process.

In order to avoid market and revenue risk, the concession agreement should clearly give

the solution for insufficient income from fares or tolls and insufficient traffic

The MCA should have provisions for selecting the competent bidder who can procure the

funds required for the project within the stipulated time to cater for the financial closure

risk

The concession agreement should be extended by the government if the land acquisition

time taken by the concessionaire is more than the estimated time

Proper provisions must be provided in the concession agreement to cater for Regulatory Risk,

Greenfield Risk, Execution Risk, Feasibility Risk etc. and their mitigation for successful

implementation of PPPs.

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Chapter 6

CONCLUSIONS AND RECOMMENDATIONS

6.1 LIMITATIONS

Currently the PPP model has not matured largely due to lack of clarity and assurances in

terms of the stakeholders interests derived from the revenue models so far developed for

roads, ports and airport projects.

At a conceptual level, clarity is clearly missing in understanding and structuring a PPP

framework from a strategic, financial, tax, legal and business perspective

PPP structures are still skewed towards the largest monopoly- the government

Ecosystem still ignores the Risk Matrix and their multiplier effect on projects and their

viability. PPPs still run more than ordinary business risks like Political Risk, Regulatory

Risk, Green-field Risk, Financial Closure Risk, Execution Risks, Feasibility Risks etc and

the interplay of this could be in geometric proportions leading to disproportionate Risk-

Reward and unfavorable investment ecosystem.

Risk capital is still averse. Large Private Equity prefer participating at grow stage when

the cash flows are visible, and the very nature of the PPPs are that they are front-loaded

with huge capital, long gestations, cash flow visibility typically after 4 to 7 years and

steady cash flows during the concession. What India needs is venture capital at pre-

operative stage once the definitive agreements are signed with the government.

Many lenders have already shot over the headroom in the infrastructure space leading to

many projects facing delays in financial closures. Clearly this requires a big push from the

Ministry of Finance and RBI in terms of dedicated pipeline for funding PPPs

Despite all the challenges, Public Private Partnerships have become increasingly attractive

as reflected in many global infrastructure initiatives. As PPPs can also achieve social and

environmental objectives, PPPs can emerge as a major mechanism to raise the standard of

living of the society.

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6.2 RECOMMENDATIONS

The Public Private Partnership agreements clearly need to specify the role of the State and

the Developer.

The Developer should be given the autonomy in handling and executing the projects. In

this regard, it is imperative that the operation and maintenance performance criteria be

fixed.

The project risks need to be identified up-front. The risks should be distributed among

stakeholders with mitigation mechanism.

The applicable income tax benefits should be made automatic or built into the concession

agreement

Infrastructure Coordination Committee should be constituted in order to clear projects at

national level

The States should also float Special Purpose Vehicles (SPVs) to attract strategic investors

for commercially viable projects.

There should be a clear dispute resolving mechanism in order to resolve any disputes

arising between the Government and the promoters

There is need for a stronger institutional mechanism in the areas if policy, regulation,

operation and Maintenance in order to promote private projects in the entire sub sectors of

Infrastructure.

Any approach to determining capital outlay for the PPPs should endeavour to balance the

conflicting objectives of allowing market driven resource allocation, ensuring objective

bid evaluation combined with reasonable scope for timely remedial action to cure any

failure on part of the concessionaire.

An integrated approach for addressing the regulatory framework of PPPs is required as the

regulatory framework is interlinked with the issue of regulated monopolies. The approach

finally adopted must take into account the degree of maturity the industry has achieved,

the future scenarios based on the past experiences of other countries and comparable

sectors, as also the features specific to the project under consideration

Grading of developers and contractors by reputed rating agencies and the pre-qualification

should be based on technical and financial evaluation.

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For capital-intensive projects, Governments should consider providing guarantees towards

foreign exchange risk on behalf of the sponsor so that project cost is minimized on

account of interest cost

Project Development Fund should be developed to cover the cost of: Preliminary due

diligence, land acquisition and statutory clearances

The Government should be encouraged to sign MOUs on projects with a Special Purpose

Vehicle (SPV)

Investment by multilateral institutions (like IFC, World Bank, etc.) should be set up on

Public –Private Partnership mode for the purposes of direct investment or lending for

Project SPVs

There should be collective understanding about the political constraints of the government

and the commercial obligations of the private promoters.

The government should consider progressive levy of appropriate user charges and tax

holidays to investors to boost the growth of PPP projects.

Globally a variety of new and innovative PPP infrastructure delivery models have been

developed in recent years to address various challenges posed to PPPs in specific

situations and sectors. Some of these hybrid PPP models are alliancing, bundling,

competitive partnership, integrator and development.

Setting up of independent regulator, PPP cell and policy at state level to closely monitor

PPPs

6.3 CONCLUSION

Public Private Partnerships are aimed in large part at increasing the delivery of

services in an era of public financial constraints by using resources of the private sector for

public aims. In that sense, it aims to improve the efficiency of service delivery, by providing

more service for less government outlay. However, it has been limited because for a variety of

reasons, there is a clear reluctance of the public sector to fully privatize services. The risks of

course are that the public and private sectors have different interests; the government is

ideally concerned with maximizing welfare, while firms aim for profit. We observe that

successful PPPs have well-defined roles that both improve the quality and quantity of

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transportation and provide at least a normal profit to private participants. We measured

success across a number of criteria, including a general assessment of the support for the

project by the various stakeholders: public, government (civil service), political, and private;

looking at adherence to initial forecasts (on-time, on-budget, demand realized); considering

whether the project was extended or the parties undertook additional projects (success breeds

success); and considering more objective assessments of whether the project served the public

good (was efficiency, equity, the environment, and the experience of users and non-users

alike improved?). Public Private Partnerships represent a flexible solution to establish

infrastructure services. Moreover, PPPs involve the sharing of risks and responsibilities

between public and private sectors.

Despite all the challenges, Public Private Partnerships have become increasingly

attractive as reflected in many global infrastructure initiatives. As PPPs can also achieve

social and environmental objectives, PPPs can emerge as a major mechanism to raise the

standard of living of the society.

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BIBILOGRAPHY

RECOMMENDED READINGS

1) “Concession agreement of Hyderabad international airport”,

http://civilaviation.nic.in/hial/CA_HIAL_singned_20122004.pdf

2) “Concession agreement of Jaipur-Kishangarh Expressway”,

http://www.nhai.org/fvb.pdf

3) “Model Concession Agreement”, Public Private Partnership in National Highways,

Planning commission

BOOKS

1) Yogendra Sharma (2008), “Public Private Partnership in Infrastructure”, Vitasta

Publishing Pvt. Ltd., New Delhi.

2) Prasanna Chandra (2002),’ Projects’, Tata McGraw-Hill Publishing Company Ltd.,

New Delhi.

ARTICLES

1) Rohit das, (January 2008), “Organized policies”, Times Journal of construction and

Design of India, pg 32-36

2) “Enabling framework for PPP”, Indian Infrastructure Journal (November 2008), pg

34-38

3) David Levinson, Reinaldo C. Garcia, Kathy Carlson, “A Framework for Assessing

Public Private Partnerships”

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4) Overview (23 rd February - 1st March), “PPP Push- Stimulating Growth through PPP

and Infra projects”, Weekly on Projects Info. of India

5) Cover story, (February 2009),“Public Private Partnerships – The big push”,

Infrastructure today Journal of India, pg 26 & 27 and 39 & 40

6) Siddhartha Das, (February 2009), “PPP works for India”, Infrastructure today Journal

of India, pg 41-44

7) Sunil Srivastava, (February 2009), “Railways- The track forward”, Infrastructure

today Journal of India, pg 48 & 49

8) Shrinivas V Kowligi, (February 2009), “Urban Development-Moving Urbania”,

Infrastructure today Journal of India, pg 50-52

9) R Ramakrishnan, (February 2009), “Partnership mode”, Infrastructure today Journal

of India, pg 53

WEBSITES

1) www.pppinindia.com

2) www.pppindiadatabase.com

3) www.finmin.nic.in

4) www.infrastructure.gov.in

5) http://business.gov.in/infrastructure/state_level.php

6) www.nhai.org

7) www.civilaviation.nic.in

8) www.airporttechnology.com

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