By Deepak Sabhlok Director Projects Ircon

1. By Deepak SabhlokDirector Projects Ircon HIGHWAY & RAILWAY PROJECTS BEING EXECUTED BY IRCON INT. LTD. ON PPP 26th September 2017

2. TYPES OF HIGHWAY PROJECTS EPC MODEL BOT OR DBFOT MODEL HYBRID ANNUITY MODEL (New Concept) • Invitation of Bids by NHAI from Private Players for construction of road project. • Successful Bidder- Has to Create Special Purpose Vehicles(SPV). • SPV may be Private Company or Govt. Company. • Financing • SPV – Financing, Design and Construction Developing, O &M, Collecting Toll. • NHAI- Support in terms of grants, premiums etc. IT IS MIX OF EPC AND BOT MODELS. (Discussed in details in next slides) • 1. Govt. Invites Bid on EPC . • 2. Govt. bears:- • Construction Cost • Procurement of Raw material. • 3. Participation - Limited to Engineering Expertise.

3. Key stakeholders and typical contractual structure for a Road project Equity Investment/ Loan Toll fee charged ConcessionAgreement Operations and Maintenance Contractual Agreements Loan facility

4. FLOW OF BOT, DBFOT AND HYBRID ANNUITY PROJECT • Invites Bids from Private Entrepreneurs. • At least 80% of the encumbrance free land for the project should be available. • Formation of a SPV to execute the project as per the conditions of the bid. • Needs to design, finance and build an infrastructure facility. • Collect Tolls and Operate the facility. • Normal Concession Period ranges from 15 years to 25 years depending upon traffic and toll collection. After the completion of the concession period, project is handed over to NHAI.

5. HYBRID ANNUITY MODEL 40% of Project Cost (Construction Support) by Govt. • Annuity payments • O & M payments • Interest Payments (on reducing balance @ Bank rate + 3%) (All Payments are to be made on bi-annually basis during the 15 years of operations period). • Construction periodOperations Period HYBRID ANNUITY PROJECT Toll Collection by Government O & M by Concessionaire 60% of project Cost-By concessionaire

6. Support by Govt in HAM 40% of Project Cost (Construction Support) by Govt. 60% of project Cost-By concessionaire during operations Period

7. WHY SHIFT FROM BOT AND DBFOT TO HYBRID ANNUITY MODEL?

8. RISK ALLOCATION IN BOT AND HYBRID ANNUITY MODEL

9. Key features of typical Concession Agreements of NHAI • Obligations of the concessionaire- Design, finance, construct, operate and maintain the project facility during the concession period as well as to levy and collect toll fees. • Toll rates- Notified by a government agency on July 1st every year. • Indemnification by NHAI- For Political risks or change in Govt. policies like latest example of Demonetisation. We are given extra tolling for the days lost. • Independent consultant or supervisor- Nominated by NHAI to monitor the progress. 50% of his payments are made by the SPV. • Force majeure clauses-Types of such force majeure and the consequent sharing of such risks among the government, Promoters and the lenders being clearly defined . • Events of Default- The situations under which suspension of the rights of the concessionaire or termination of the agreement can take place.

10. Key features of typical Concession Agreements of NHAI • Financial Closure - SPV has to make financial arrangement for the project within 150 or 180 days(depending upon projects) from the date of signing of concession agreement. • Escrow Account- The concessionaire has to open Escrow Account with the Bank for depositing toll collection. • Safety Requirements- Like fire brigades, cranes, ambulances, patrolling Vehicles • Suspension of Concessionaire Rights- Example, If traffic increases and lanes of highway has to be increased, NHAI will invite tender and if the concessionaire not successful, then NHAI will hand over the project to other successful bidder.

11. BRIEF DISCUSSION AND EXPERIENCE OF IRCON IN EXECUTION OF HIGHWAY PROJECTS on BOT……..

12. HIGHWAY PROJECTS OF IRCON

13. IRCON-SOMA TOLLWAY PRIVATE LIMITED(ISTPL)

14. IRCON-SOMA TOLLWAY PRIVATE LIMITED • Basic Details of the project-Dhule-Pimpalgaon

15. IRCON-SOMA TOLLWAY PRIVATE LIMITED • Basic Details of the project

16. ISTPL- Financing of Loan Financing of the Loan (Year 2006) SBI Bank as lead bank in consortium with 8 other banks -Rs.450 crore Axis Bank (Rs.60 crore) Refinancing of the loan (Year 2011) PNB Bank Approved –Rs.600 crore, Availed- Rs.521.53 crore O/S as on date – Rs.109.10 crore

17. Major Securities provided in Connection with Loan By ISTPL: • First Charge on Immovable Properties and hypothecation of movable properties and banks accounts including Escrow Account. • Equitable mortgage on the vacant land of 280.50 sq. mtrs. situated in Vadgaon in Pune. By Promoter Companies(IRCON and SOMA in proportion to their shareholdings):- • Pledge of 30% of their respective shareholding in favour of Bank. • Non disposal undertaking to the extent of 21% of their shareholding. • Undertaking to the extent of 50% to make good shortfall of any dues by ISTPL.

18. Tollway Projects - Basic Features • Mandatory Project facilities- Food Plaza/Restraunts/Rest Rooms/Bus Bays/Truck Lay Byes/Toilets/ Solar Blinkers/Signals which are mandatorily required to be provided by concessionaire. • User Fee • It is linked to wholesale price index of March of every year. • It is revised every year and made effective from 1st July of every year. Collection Paise per km (2017)- Starting from Rs.1.059 to Rs.5.959 per km depending upon the type of vehicle. (Increased in this year i.e 2017-18 by 5% but was constant in previous 2 years i.e 2015-16 and 2016-17)

19. Lessons Learnt from ISTPL’s Project:- Lessons Learnt from ISTPL’s Project:- • Initial financial model- Should be as accurate as possible to arrive at viability/profitability of project. • Designing and Construction- It should be such that minimum maintenance during Operation and Maintenance phase. • Financial Closure- Should be achieved on time so that construction can be started. • Refinancing- It should be avoided due to administrative delays. • Construction Completion- Should be well within/before time.

20. RAILWAY PROJECTS

21. Projects being executed by IRCON on PPP mode • 23 Multi Functional Complexes (MFCs) through IrconISL on BOT Model • 12 Railway Stations through IRSDC (a JV with RLDA) • Coal/Mine Rly Projects in Chhattisgarh, Odisha & Jharkhand through 26% partnerships in 5 (Five) JVs • 4 BOT Road Projects- One as 50:50 JV with Soma Enterprises and other three as WOS

22. Models of execution of Railway Projects under PPP • Railway Board issued Policy on participative models of PPP vide Boards letter no 2011/Infra/12/32 dated 10.12.2012 pursuant to Cabinet decision which provides for five different models • Non Governmental Private line model • JV model • BOT through competitive bidding • Capacity Augmentation through Customer funding • Capacity Augmentation through – Annuity model

23. Ongoing Railway Projects executed by IRCONunder JV model • Chhattisgarh East Railway Limited (CERL) • Chhattisgarh East West Railway Limited (CEWRL) • Mahanadi Coal Railway Limited (MCRL) • Bastar Railway Private Limited (BRPL) • Jharkhand Central Railway Limited (JCRL)

24. Joint Venture Model-Roles and responsibilities • JV with strategic stakeholders (State Govt, ports, mines Industries ) • By formation of JV with Railway/PSU with a minimum of 26% equity. • Maintenance by JV • Normal concession period 30 years, beyond 25 years linked with traffic • Concessionaire to be given user fee equivalent to 50% of the apportioned freight earnings.

25. Railway Corridors Through JV model by SPVsof IRCON

26. Railway Corridors Through JV model by SPVsof IRCON

27. CEWRL – Rs.4919 Cr Route Length – 197 Km Track Length – 352 Km CERL (Ph-II) – Rs.1349 Cr Route Length – 62 Km Track Length – 62 Km LOCATION MAP – SPVs in Chhattisgarh CERL (Ph-I) – Rs.3055 Cr Route Length – 132 Km Track Length – 197 Km

28. Chhattisgarh East Railway Limited (CERL) • Formation: CERL was incorporated on 12th March 2013 as a Special Purpose Vehicle (SPV) to develop East Corridor (Kharsia to Dharamjayagarh) . • MoR nominated Ircon International Limited (Ircon) to participate in the SPV .

29. Promoters and their share in CERL SECL – 64% Ircon – 26% Promoters of Chhattisgarh East Railway Limited (CERL) GOCG – 10%

30. Chhattisgarh East Railway Limited • Scope of Work- Main object of CERL according to its Memorandum & Articles of Association, is to build, construct, operate and maintain the East Rail Corridor in the state of Chhattisgarh, which shall be used for both freight and passenger services.

31. Salient features of JV Model • Projectshave been developed by the JV through Railway’s PSU • Financial Structuring will be done by the JV • Railway will provide for Risk mitigation measures – like inflated mileage, 90% guarantee of loan to debtors post construction; rolling stock availability . • Ownership of land will remain with Railway ; • The project financing will be done by JV through Equity & Debt • JV will identify projects and if bankable, submit the DPR to Railway for approval; • Railway has to sanction the works as a Railway Work; • The project construction and maintenance will be done by the JV • Concession period is 30 years including construction period. • Revenue for the JV company will be from the apportioned traffic earnings.

32. Various steps involved • Formation of JV company and signing of MOU • Identification of Projects by JV • Shareholder’s agreement • Preparation of DPR • Preparation of Financial Appraisal and Traffic Study • Approval of DPR by Railway along with Inflated Mileage • Signing of Concession Agreement • Appointment of Syndicating Agency for loan • Financial Closure • Appointment of Independent Engineer • Land Acquisition and forest clearance • Approval of Drawings by IE/Railway • Construction of the project – depend on Railway for rails and sleepers • Modification to existing Railway yard where connectivity is given • Final certification by IE and CRS – since passenger trains are to be run as per concession agreement

33. Basic Details of the project CERL phase I

34. Chhattisgarh East Railway Limited • Financial Closure- Indian Bank as a lead Banker in a consortium of 7 other Banks has sanctioned a loan of Rs.2600 crore. • Inflated Mileage- Basically, Inflated Mileage is the indirect way of funding by the MoR to increase the viability of project. • The Railway Board, MoR has approved Inflated Mileage for the Phase-I Project at the rate of 60% for the first five years operation.

35. Project Implementation Details- • Land – GoCG will provide land owned by them and facilitate acquisition of balance land. • While the land has to be acquired by the Company at its own cost, ownership of the land will vest with Indian Railways. • The Company will pay a token lease of Re. 1 p.a. for the entire concession period as per the provisions of the Concession Agreement to Railways . • Cost of land borne by the Company will be treated as a non-interest bearing advance deposit, which will be refunded to it by MoR at the end of the concession period.

36. Perform activities like route selection, land acquisition, obtaining forest clearances, R&R works etc. and also co-ordinate the activities of various contractors Execution Agreement between CERL & Ircon Ircon’s Role in Project Implementation Details- Ircon will be responsible for construction & completion of the Phase-I Project.

37. Benefits of JV model • Being a Railway project with well defined stake holders, like mines, ports etc., chances of failure are minimized . In case of MCRL , traffic provider MCL is 64% shareholder , State govt is 10% shareholder who is responsible for land availability and executing agency Ircon is 26 % shareholder . • Since the DPR is approved by Railways duly considering the traffic forecast, it gives the lenders more confidence. • Involvement of Railway’s PSU in project development ensures a better professional approach to the project • State Govts are more helpful since they are part of JV model projects arebenefited by the Railway projects. • Concession period is extendable if materialization of traffic falls short of expectation, • Land acquisition can be expeditious by declaring the project as declared as Special Railway Project

38. Limitations of the JV Model (cont. ) • All approvals at various stages are to be obtained from Railways, which is normally time consuming. • The approval of DPR and Inflated Mileage takes more than 6 months after submission of Final DPR. • If traffic does not materialize as per forecast, there is no safeguard for the JV. Railway will only apportion earnings for the traffic actually moved. • The formula adopted by Railway Board for apportionment of earnings does not take care of capital cost involved – JV gets same apportionment whether it is electrified section or not – Capital cost of electrification is not compensated. • The concept of Inflated mileage may not work beyond a limit, as it hurts the customer – viability gap funding by Railway may be a better option as Railway gets the incremental traffic.

39. Limitations of the JV Model (Cont.) • No operational freedom to JV since IR is the only operator and tariff is controlled by IR. • No freedom to exploit the land commercially since IR become the owner of land • If any partner’s business is not directly linked to the success of the JV project, they tend to lose interest over time. Therefore mines, ports, industries who are direct beneficiaries from the completion of the JV project should be taken as partners. • There is no possibility for the JV earning more than the anticipated profit since if more traffic materialises, the concession period will be reduced.

40. Limitations of the JV Model (Cont.) • In the absence of a Regulator, the JV company has no proper mechanism to address its grievances against Railways – like delays caused in approvals, payments, providing timely rolling stock etc. • No revenue from passenger traffic is apportioned – maintaining passenger amenities and their security has substantial cost to the JV. • No compensation by Railway for replacement of assets during operation period.

41. Challenges in arranging Funds • Problem with promoter guarantee :- syndicator SBI CAPs did not agree to fund the project w/o promoters guarantee for the gaps in the event of failure . Railway Board provides 90 % guarantee of the loan amount  to lenders in the event of failure post construction only . So promoters guarantee was insisted by SBI CAPs for 100% loss during construction and 10% gap post construction . It was  impressed upon the banker that promoters guarantee is not required as project is to financed based on the strength of the project . Indian bank finally agreed to extend loan w/o promoters guarantee .

42. Compensation and R&R Policy For land owners :- • In Chhattisgarh, after policy revision as per circular dated 4/01/17 of GOCG, Compensation will bepaid to land owners equal to 4 times the land price. • It is also decided that compensation for linear projects in the State of CG which entitles the land owner for R&R compensation of Rs. 5.00 Lakh or 50% of the land compensation whichever is less in addition to the land compensation.

43. Challenges in forest clearance and NGT stay • Forest department has provision to ask if alternate route to the forest area is available . If alternate route is available , then forest department will instruct to use alternate route for the project . If alternate route is not available , then no construction should be undertaken as project is to be abandoned in case forest does not agree for forest land to be used for the project . So NGT imposed stay on construction activity due to want of forest clearance.

44. NGT case • The petitioner has filed a plea before the NGT Court vide appeal No.151 and OA No. 470/2015 that CERL was carrying out work without any forest clearances from the authorities in between chainage 0-10 & 0-28 Km.In course of hearing on 25.05.2017 NGT has asked CERL to stop the work even though stretch involved is only 600 mt and 2kms respectively but work stopped in whole stretch of 10 kms and 28 kms

45. Sharing Experience • Construction should not be started before Financial Closure from the borrowers • The work should not be started before forest environmental and wild life clearances obtained as applicable on the alignment • Execution of project should be done after at least 80% land is acquired and possession taken . • Promoters Guarantee is not to be given to the financing institutions. • IRSE officers are required for the post of COO for the SPVs in SAG grade.

46. Thanks