Richard Michael: Financing Roads in India: A Lender S Perspective New Delhi, 5 February 2007

FINANCING ROADS IN INDIA : A LENDER‘S PERSPECTIVE
New Delhi, 5 February 2007
Richard Michael
Managing Director,
Infrastructure Finance Unit
•DEPFA BANK
Contents
1. Overview of road project development in India

2. Financing road projects in India
3. Risk analysis and project financing
4. Annuity based versus toll based projects
5. Case studies – Indiana Toll Road and Golden Ears Bridge
6. Questions and contact details
2
•DEPFA BANK
Road Infrastructure Development
Out of the extensive road network of 3.3 million kms, National Highways
constitute only 2% of length, but share almost 40% of total traffic
Ambitious National Highway Development Programme (NHDP) involving
total investment of about USD 50 to 60 billion over the next 5 years
NHDP Phase I & II
Golden Quadrilateral (GQ) connecting Dehli, Mumbai, Chennai and
Kolkata
GQ near completion
North-South and East-West Corridors (NS-EW corridors)
NS-EW corridors to be completed by December 2009
Port connectivity and others
NHDP I & II mostly public funded, not more than 10% via BOT
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•DEPFA BANK
Delivery of NHDP I & II
Time overrun
Golden Quadrilateral was scheduled to be completed in Dec. 2003
NSEW corridor was scheduled to be completed in Dec. 2007
Causes
Delays in land acquisition, shifting of utilities, clearance for road over-
bridges and environmental approvals
More private participation

In order to mobilize private sector funding and to improve contractual
performance, the government has decided to allow more private
participation in NHDP III, IV, V, VI and VII through either BOT-toll or BOT-
annuity.
4
•DEPFA BANK
Source of Finance for Road Infrastructure Development in India
Sources of funding
Government funding through a cess on diesel and petrol
Viability gap funding (up to 20% of capital cost and 20% of O&M)
Long term external loans from multi-lateral agencies
Private sector through PPP model
(requires equity from project sponsors and debt financing from local and
international banks arranged in the project finance fashion)
5
•DEPFA BANK
Risk Identification & Analysis in Road Projects
Main types of risk :

Right-of-way
Construction
Operation
Environmental impact
Traffic
Tariffs
Competing roads
Political
Interest rates
Exchange rates
Inflation
Force majeure
Project sponsors/bidders carry out their own investigation (“due diligence”) and
appoint specialist advisors : financial, legal, technical, traffic, insurance.
Lenders engage independent experts to review the work and conclusions
Risks allocated to parties in the best position to manage respective risks
6
•DEPFA BANK
Typical Road Project Structure
Private Sector Public Sector Road users or

Sponsors Concession
public sector
Equity
Agreement
Dividend Toll or Availability Payment
Contract Fee Operator Fee

EPC Project Operator
Contractor Company
EPC Contract O&M Contract
Principal and interest Loan or Credit

Loan Agreement Support Agreement
Commercial Multilateral
Bank Lenders Development Bank
7
•DEPFA BANK
Risk Through the Life Cycle of a Project
Start of operations /
“ramp-up period”
Project
Risk
“Steady-state”
Time
Construction Phase
8
•DEPFA BANK
Annuity (Availability) Based versus Tolled Based Road Projects
Availability Based Projects

Grantor assumes traffic risk
Project sponsors do not assume traffic risk but obligated to make the
road “available” according to certain specifications. Deductions if
specifications not met.
Lenders rely on creditworthiness of grantor
Toll Based Projects
Project sponsors assume traffic risk.
Require a comprehensive study on traffic forecast.
Lenders will independently conduct due diligence on traffic forecast
Lenders prefer non-intervention on tariff as well as inflation indexed
tariff
Nevertheless, lenders should be concerned with project fundamentals

no matter what structure is used.
9
•DEPFA BANK
Shadow Toll Road
A unique payment mechanism in toll based project

“Shadow toll” means road users themselves do NOT pay tolls, but
instead traffic is counted and Government makes a monthly payment
based on a fee per vehicle/km travelled
Such fees payable may be subject to deduction for poor maintenance
e.g. damaged road pavement, grass cutting, highway lighting, poor
signage, unplanned lane closures for repairs
Fees are “banded” so that as traffic volume increases marginal revenue
decreases
Top band pricing is set at 0p so as to cap return to project company –
even though operational costs may continue to increase
10
•DEPFA BANK
Shadow Toll Road (cont’d)
000s
Traffic 300 Band C

volume (0 p/km)
(vehicle/ 200
km) Band B
(0.15 p/km)
100
Band A
(0.25 p/km)
0
Time
Note : as traffic volume increases the fee paid decreases. Fee for
Band C is set at 0 p/km to protect Government against “super
profits” being made by the project company
11
•DEPFA BANK
Framework of NHAI Model Concession Agreement (Lenders’ Perspective)
Model Concession Agreement

An important government initiative to encourage private participation
Put forward principles upon which concession agreement should be
drafted
Transparent selection process – amount of grant
Government guarantee of state obligations
Automatic tariff revisions
Limits on competing routes
Assistance with land acquisition
Financial close in 180 days
12
•DEPFA BANK
Framework of NHAI Model Concession Agreement (Lenders’ Perspective) (cont’d)
Lenders’ main areas of concern

1. Right of substitution
Proposed principles : lenders have assignment and substitution rights if
concessionaire fails to operate project successfully
Lenders’ concern : actual enforcement of substitution rights in
developing countries [prominent example : BTSC, lenders have
difficulties in replacing operator]
2. Force majeure
Proposed principles : protection for Concessionaire against political
actions that may have a material adverse effect on the project
Lenders’ view : welcomed such provision
13
•DEPFA BANK
Framework of NHAI Model Concession Agreement (Lenders’ Perspective) (cont’d)
3. Termination provisions and compensation

Proposed principles :
Compulsory buy-out by authority upon termination
Political force majeure and defaults by authority qualified for
compensation payments
Full project debt recovery except :
Concessionaire default, 90% debt protected
Non-political force majeure, 90% debt beyond insurance cover will be
protected
Lenders’ view : termination should not be too easily triggered
4. Others
International standard documentation; definitions of terms, actual wordings, etc.
Foreign exchange risk not dealt with if debt finance is raised in foreign currencies
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•DEPFA BANK
Cover Ratios
ADSCR : Annual Debt Service Cover Ratio

= net cashflow available for debt service (i.e. revenue – O&M costs and taxes) in
the next year / debt service falling due within next year
LLCR : Loan Life Cover Ratio
= NPV of net cashflow available for debt service during the loan period / amount
of loan
PLCR : Project Life Cover Ratio
= NPV of net cashflow available for debt service during concession period /
amount of loan
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•DEPFA BANK
Cover Ratios : comparative examples
BASE CASE RATIOS FOR ADSCR LLCR PLCR

SENIOR DEBT minimum
“Greenfield” toll road project

(full traffic volume and
1.50 2.00 2.50
payment risk)
Shadow toll road (full traffic

volume but NO payment risk)
1.40 1.75 2.00
Annuity (availability) style

road project
1.20 1.35 1.40
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•DEPFA BANK
Cover Ratios : usage
Periodically, as the project progresses, the forecast data in the model

will be replaced with actual numbers (e.g. construction costs) and
updated economic assumptions (e.g. GDP growth rate, interest rate) and
new cover ratios will be produced.
These will be compared with the minimum requirements set out in the
Loan Agreement e.g.
> Min. ADSCR covenant : 1.20
> Distribution lock-up: 1.15 (=> no dividends can be paid)
> Event of default : 1.05 (=> banks can enforce security and
“step-in”)
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•DEPFA BANK
Recent Road Deals in India
Tenors typically 13 to 14 years
Debt / Equity Ratio : 3 / 1
Pricing in region of PLR (Preferred Lending Rate) minus 2%
Dominated by SBI (State Bank of India) and other local banks
USD borrowing now move favourable
18
•DEPFA BANK
Indiana Toll Road (toll-based)
Project description
Largest PPP in the USA to date, one of the largest in the world
Connects Chicago and the west with Ohio and the northeast USA. So
called “main street of the Midwest”, 157 miles long
Critical transcontinental route that moves freight to and from major US
distribution hubs
Granting of the concession allows the Indiana Finance Authority to
reduce outstanding debt and invest in new infrastructure
75-year concession involves the lease, operation and maintenance of the
road and implementation of an electronic tolling system
Total size of the deal : USD 4.1 billion (DEPFA’s commitment as
mandated lead arranger : USD 580 million)
Toll-based project : Traffic and Revenue Report prepared by Maunsell

Australia
19
•DEPFA BANK
Key features of the Concession Agreement (Indiana Toll Road)
Lessor : The Indiana Finance Authority (IFA)

Concessionaire : Macquaire and Cinta
Term : 75 years
Revenues : Tolls; no approval from IFA is required for implementation
Lenders’ protection :
Termination Compensation = the greater of the fair market value of
the Concessionaire’s interest in the toll road and the outstanding
debt
Lessor and concessionaire cannot amend the agreement without
lenders’ approval if the amendment would materially adversely affect
the lenders
Lenders’ cure rights for events of default of the Concessionaire
20
•DEPFA BANK
Golden Ears Bridge (availability based)
Project description
The project has, for many years, been part of the long term transportation plans
of the Greater Vancouver Transportation Authority and the Province of British
Columbia
Development of a new 6-lane bridge over the Fraser River to improve movement
in the greater Vancouver region
Will provide users with a projected 20min – 30min time saving
Will provide a vital link between the communities on both sides of the river
Largest PPP in Canada to date with a total investment value of € 900m
One of the largest monoline wrapped loan PPP transactions in the world in 2006
(XL Capital and Ambac as wrapper)
Total size of the deal : CAD 1.1 billion (DEPFA’s commitment as mandated lead
arranger : CAD 560 million)
Availability payment : lessor assumes traffic risk
21
•DEPFA BANK
Key features of the Concession Agreement (Golden Ears Bridge)
Lessor : Vancouver Transport Authority (Aa3 rated by Moodys)

Concessionaire : Golden Crossing Group, 100% owned by Bilfinger
Berger BOT GmbH
Term : 32 year post-construction
Revenue : Availability payment from Lessor
Index-linked (CPI) availability payments :
Capital payment to cover costs of capex
Operation and maintenance payment
Security incentive payment
Penalty : Concessionaire will be penalized for non-availability and poor
operation and maintenance
22
•DEPFA BANK
Questions and Contact Details
Richard Michael
Managing Director
Infrastructure Finance Unit
DEPFA Investment Bank Limited
1104-5 ICBC Tower
3 Garden Road
Hong Kong
E-mail: [email protected] Phone: +852 2509 8700
23

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FINANCING ROADS IN INDIA : A LENDER‘S PERSPECTIVE

New Delhi, 5 February 2007

1. Overview of road project development in India

More private participation

 Main types of risk :

 Risks allocated to parties in the best position to manage respective risks

Private Sector Public Sector Road users or

Contract Fee Operator Fee

Principal and interest Loan or Credit

Availability Based Projects

Nevertheless, lenders should be concerned with project fundamentals

 A unique payment mechanism in toll based project

Traffic 300 Band C

Model Concession Agreement

Lenders’ main areas of concern

3. Termination provisions and compensation

 ADSCR : Annual Debt Service Cover Ratio

BASE CASE RATIOS FOR ADSCR LLCR PLCR

“Greenfield” toll road project

Shadow toll road (full traffic

Annuity (availability) style

 Periodically, as the project progresses, the forecast data in the model

 Tenors typically 13 to 14 years

 Debt / Equity Ratio : 3 / 1

 Pricing in region of PLR (Preferred Lending Rate) minus 2%

 Dominated by SBI (State Bank of India) and other local banks

 USD borrowing now move favourable

Toll-based project : Traffic and Revenue Report prepared by Maunsell

 Lessor : The Indiana Finance Authority (IFA)

Availability payment : lessor assumes traffic risk

 Lessor : Vancouver Transport Authority (Aa3 rated by Moodys)

Infrastructure Finance Unit

DEPFA Investment Bank Limited

1104-5 ICBC Tower

E-mail: [email protected] Phone: +852 2509 8700

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Main types of risk :

Risks allocated to parties in the best position to manage respective risks

A unique payment mechanism in toll based project

ADSCR : Annual Debt Service Cover Ratio

Periodically, as the project progresses, the forecast data in the model

Tenors typically 13 to 14 years

Debt / Equity Ratio : 3 / 1

Pricing in region of PLR (Preferred Lending Rate) minus 2%

Dominated by SBI (State Bank of India) and other local banks

USD borrowing now move favourable

Lessor : The Indiana Finance Authority (IFA)

Lessor : Vancouver Transport Authority (Aa3 rated by Moodys)