1

Project Finance

A Case Study

On

Panipat–Jalandhar Toll Road Project

Written by:

Deepti Mishra

Mithlesh Jha

Neeraj Kumar Ojha

2

National Highway 1 Panipat–Jalandhar Toll Road Project

On October 23, 2008, the board of Asian Development Bank (ADB) was presented a proposal

to approve a loan of $ 240 million for National Highway 1 Panipat-Jalandhar Toll Road

Project. This Project would help address the problem of capacity shortage in the road sector in

India and is important from the point of socio-economic development and economic growth

of the country. The President of ADB, Mr Haruhiko Kuroda, was confident that the proposed

loan would serve ADB's strategy of poverty reduction through infrastructure-led growth.

The proposed highway runs through the so called "bread basket" of India. It is part of the

historical Grand Trunk road which runs from Sonargaon in Bangladesh to Peshawar in

Pakistan. The road was upgraded to four lanes in the past decade and is now being expanded

to six lanes due to rapid growth in traffic and increasing congestion. There was little debate

on the merits of loan as it satisfied all the existing criteria of ADB. The loan was consistent

with ADB's private sector development strategy, country strategy, sector strategy and the long

term strategy of infrastructure development through increased private sector participation. The

proposed ADB financial assistance would be catalytic, allowing the Project to raise long-term

debt financing.

___________________________________________________________________________ MBA students Deepti Mishra, Mithilesh Jha, Neeraj Ojha wrote the case under the

supervision of Professor Anoop Singh of IME Department, IIT Kanpur. The case study is

purely for academic purpose. It is not meant to serve as endorsement or source of primary

data.

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1.1 Introduction to Indian Roadways

Roads are considered to be one of the most cost effective and preferred modes of

transportation. Roads are critical for country's overall socio-economic development. An

efficient and well-established road network is inevitable for promoting trade and commerce as

well as meeting the needs of a sound transportation system in the country. Road transport

accounts for about 65 per cent of freight (in ton-km) and 86.7 per cent of passenger traffic (in

passenger-km) in India. India has one of the largest road networks in the world with a total

road length of 3.34 million kilometres. Indian road network consists of expressways, national

highways, state highways, district roads and village roads. The number of vehicles has been

growing at an average rate of 10.16 per cent per annum over the five years (2003-2008). The

share of road in total traffic has grown from 13.8 per cent of freight traffic and 15.4 per cent

of passenger traffic in 1950-51 to an estimated 65 per cent of freight traffic and 86.7 per cent

of passenger traffic by the end of 2004-05. This rapid growth in traffic has led to deterioration

of road infrastructure, traffic congestion and increase in the cost of transportation. Therefore

the road infrastructure needs to be improved for better energy efficiency, lesser pollution and

enhanced road safety. The Indian economy has been one of the fastest growing economies in

the world. To sustain this growth, there is a need to improve and expand the road

infrastructure.

1.2 Indian Road Network

India has the second largest road network in the world. Indian roads can be broadly classified

in four categories as shown in the table below.

Table 1: Indian Roads Classification

1 National Highways/Expressways 66754 km

2 State Highways 128000 km

3 Major and other District Roads 470000 km

4 Rural Roads 2650000 km

Source: Department of Road Transport and Highways, Ministry of Shipping, Road Transport

and Highways, Government of India. 2008. Annual Report 2007–2008. India.

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National Highways constitute only about 2 per cent of the road network and it carries 40 per

cent of the total road traffic. National Highways further classified depending upon the

carriageway width of the Highway. Generally, a lane has a width of 3.75 metres in case of

single lane and 3.5 metres per lane in case of multi lane National Highways. The percentage

of National Highways in terms of width is as given below.

Table 2 : The National Highways Classification (in terms of width)

1 Single Lane/ Intermediate lane 18350 km (27%)

2 Double lane 39079 km (59%)

3 Four Lane/Six lane/Eight Lane 9325 km (14%)

Source: Department of Road Transport and Highways, Ministry of Shipping, Road Transport

and Highways, Government of India. 2008. Annual Report 2007–2008. India.

The Department of Road Transport and Highways under the Ministry of Shipping, Road

Transport and Highways (MOSRTH) is responsible for construction and maintenance of

National Highways (NH). The responsibility for development of other categories of roads

rests with the states/Union Territories.

2.1 National Highways Authority of India (NHAI)

The National Highways Authority of India was constituted by the National Highways

Authority of India Act, 1988. NHAI is responsible for the development, maintenance and

management of National Highways entrusted to it. NHAI became operational in February,

1995. NHAI is currently managing around 14,162 km of national highways. The first and the

foremost task mandated to the NHAI is the implementation of National Highway

Development Project (NHDP).

2.2 National Highways Development Project (NHDP)

NHDP is one of largest projects undertaken by the Government of India. NHDP was launched

by NHAI in 1999 for capacity enhancement of National Highways. NHDP programme was

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introduced in a phased manner starting with Phase I and Phase II. As of 31 March 2008, the

programme has been planned in seven phases with an estimated expenditure of Rs. 2,35,690

crore till 2015. The seven phases of NHDP are as follows.

1. NHDP Phase-I

Envisage four/six/eight laning of about 14,000 km. of National Highways, at

an estimated cost of about Rs. 65,000 crore.

2. NHDP Phase-II

Golden Quadrilateral (GQ), North-South & East-West Corridor (NSEW), Port

Connectivity and Other Projects.

3. NHDP Phase-III

Up gradation of 12,109 km of National Highways on Build, Operate and

Transfer (BOT) basis.

4. NHDP Phase-IV

Widening of 20,000 km of National Highways to two lanes with paved

shoulders.

5. NHDP Phase-V

Six-laning of 6500 km length of selected National Highways.

6. NHDP Phase-VI

Development of 1000 km of Expressways.

7. NHDP Phase-VII

Construction of 700 km of ring roads of major towns and bypasses.

National Highways Development Project is being implemented in 4 phases I, II, IIIA & V as

of 28 February, 2009. The present phases under Phase I, II & IIIA envisages improving more

than 25,785 km of arterial routes of NH Network to international standards. NHDP Phase I &

II are likely to be completed by December 2008 whereas NHDP Phase IIIA is scheduled for

completion by December 2009. In addition to above, 6 laning of 148 km has been awarded 6

laning is proposed under NHDP Phase V.

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Table 3: NHDP Projects Status as of 28 February, 2009. GQ

NS – EW

Ph. I & II

NHDP Phase

III

NHDP Phase

V

NHDP

Total

Total Length

(Km.)

5,846

7,300

12,109

6,500

31,755

Already 4-

Laned

(Km.)

5,719

3,357

711

90

9,877

Under

Implementation

(Km.)

127

2,994

1,954

940

6,015

Contracts

Under

Implementation

(No.)

15

131

31

2

179

Balance length

for award

(Km.)

-

791

9,444

5,470

15,705

Source: National Highway Authority of India (NHAI).Website page

http://www.nhai.org/WHATITIS.asp accessed on 10/04/2009

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Exhibit-1: National Highway Development Project

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2.3 Funding of the Projects

NHAI projects are funded by following financing mechanisms:

1. Budgetary Allocation: The central government provides funds for developing road

projects of National Highways.

2. Central Road Fund: The Central Government has created a dedicated fund called

Central Road Fund (CRF) from collection of cess on petrol and high speed diesel oil.

Presently, Rs.2 per litre is being collected as cess on petrol and high speed diesel oil.

The fund is distributed for development and maintenance of national highways, state

roads, rural roads, and for railway over bridges/under bridges and other safety

features, as provided in Central Road Fund Act, 2000. As of 28 February 2009, The

Cess contributes between Rs 5 to 6 Thousands crores per annum towards NHDP.

Table 4 give details of the central road fund for year 2007-08.

Table 4: Central Road Fund for Year 2007-08.

1 National Highways Rs. 6541.06 Cr.

2 Rural Roads Rs. 3825.0 Cr.

3 Railways Rs. 724.69 Cr.

4 Grant to State Governments and UTs for State roads Rs. 1565.32 Cr.

5 Grant to States & UTs for Roads of Inter-State

Connectivity and Economic Importance

Rs. 173.93 Cr.

Total Rs. 12830.00 Cr.

Source: National Portal of India website page

http://india.gov.in/sectors/transport/national_highway.php?pg=2 accessed on 10/04/2009

3. Loans: Loan assistance from international funding agencies like Asian Development

Bank (ADB), World Bank and Japan Bank of International Co-operation.

4. Market Borrowing: NHAI issues market based securities like bonds.

5. Public Private Participation (PPP): To attract foreign as well domestic investors, some

projects are offered on Build Operate and Transfer (BOT) basis to private agencies.

Other forms of PPP model like DBFO and BOT (Annuity), which are variants of BOT

model, are also used for private sector participation. As of 28 February 2009, 202

projects are funded by PPP model.

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3.1 The Project: NH-1 Panipat–Jalandhar Toll Road Project

The NH-1 Panipat–Jalandhar Toll Road Project is the largest among the NHDP phase V

projects. The project consists of six-laning of 291 km of the existing four lane NH1 road from

Panipat (96 km) to Jalandhar (387 km). It is one of the first projects to be based on DBFO

pattern. In the traditional BOT model input and output parameters are defined. But in DBFO

model, only output parameters are defined. The developer is responsible for the design,

engineering, construction, development, finance, operation and maintenance of the road. The

project also consists of building flyovers, overpasses and underpasses on all existing

intersections to allow continuous flow of traffic. After financial closure the concessionaire

will be allowed to collect tolls for 15 years. After that the road will be transferred back to the

NHAI.

In this project, the revenue sharing model is being used for the first time in a BOT model. In

the traditional BOT model, the bid winning criteria is annuity or up-front lump sum payment

to NHAI. However, in this project the bid winning criteria is the percentage of revenue the

bidder will share with the NHAI.

Exhibit-2: NH-1 Panipat–Jalandhar Toll Road Project

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The NH-1 is used by a large number of vehicles owners heading to Delhi, Haryana, Punjab,

Himachal Pradesh and Jammu and Kashmir. The Road is also part of ambitious North-South

Corridor of Natioanal Highways. This road passes through various agricultural and industrial

hubs of Northern India like Jalandhar, Ludhiana, Gobindgarh, Ambala, and Karnal. The road

also connects various pilgrim centers like Sirhind, Fatehgarh Sahib, Amaranth, and

Vaishnodevi. It also connects the popular tourist destinations like Simla and Kashmir.

4.1 Structuring the project company

The project sponsors created a separate project company ―Soma Isolux NH One Toll Way

Private Limited‖ (termed as Soma Isolux in short) to obtain financing and manage the

operations of the project. The Indian sponsor, Soma Enterprise, joined hands with Isolux

Corsan group, a Spanish firm, to form the special purpose vehicle. Isolux Corsan Concesiones

and Corsan-Corviam Construccion are two separate companies of the Isolux Corsan group

which have joined the project company as sponsors. The equity ownership of the sponsors

comprises of Isolux Corsan Concesiones (51%), Corsan-Corviam Construccion (10%) and

Soma Enterprise (39%). Exhibit-3 explains the corporate structure of the project company.

4.2 Soma Enterprise Ltd.

Soma Enterprise Ltd. is one of the fastest growing infrastructure companies of India. The

company has focussed its operation on construction and development of core infrastructure

projects in the transportation, hydel power and water resource sectors. It has recently

diversified into urban infrastructure projects including commercial and residential real estate.

Soma recorded a turnover of Rs.17.44 billion in 2007-08 and is currently executing projects

worth Rs.110 billion. Soma is actively pursuing 'Public Private Partnerships' (PPPs) mode for

construction and operation of infrastructure services in India.

Some of the key projects taken up by Soma through PPP are

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1. Bangalore Elevated Expressway: Construction of Elevated Highway Project on

Bangalore - Hosur Section of NH-7 from Silk Board Junction to Electronic City

Junction on BOT basis at a total cost of Rs. 7760 Million.

2. Sissiri Multi Purpose Project (Arunachal Pradesh): It will consist of a 204 m high

concrete dam and a power house having 3 units of 74 MW on BOT Basis.

3. Development of Commercial Zone at Musheerabad, Hyderabad for Andhra Pradesh

State Road Transport Corporation on BOT Basis.

4. Development of an Integrated Textile Special Economic Zone at Kagal, Kolhapur for

Maharashtra Industrial Development Corporation, Govt. of Maharashtra on BOT

Basis.

5. Development of Commercial Centre at Bhains Than, Ramsagar Para Ward, Raipur for

Raipur Municipal Corporation.

Soma, a typical civil engineering and construction firm, plans to branch out into BOT

business. This project would give Soma the opportunity to consolidate its position in the

infrastructure space in India. Soma is keen to take up large infrastructure projects either on its

own or as part of a consortium. Soma has received the ISO 9001 certification for design,

planning, construction, and project management for infrastructure and turnkey projects.

4.3 Isolux Corsan

Isolux Corsan is one of the largest Spanish companies in the sector of engineering,

construction, concessions, services and real estate promotions. In addition to its strong

presence in Spain, the group has a strong international presence extending to more than 30

countries in five continents. Corsan-Corviam Construccion is the construction arm and Isolux

Corsan Concesiones is the concession arm of the company. Isolux Corsan sees India as one of

its key future markets and has built up its India office for a long-term position in the market.

Isolux Corsan has also formed a long-term joint-venture relationship with Soma, and plans to

implement many projects jointly in India. The Madrid–Toledo Toll Highway AP-41 (Spain),

Monterrey–Saltillo Toll Highway (Mexico), A-4 Expressway Madrid–Ocaña (Spain) and

Perote–Banderilla Toll Highway (Mexico) are a few of its prominent road projects.

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4.4 Project Management

The management control of Soma Isolux is through a board consisting of five members.

Isolux Corsan Group has the right to nominate three directors and Soma has the right to

nominate two directors on the board of Soma Isolux. The board will delegate the day-to-day

work to the general manager of the SPV.

Soma Isolux will enter into an EPC agreement with a joint venture of Corsan-Corviam

Construccion and Soma Enterprise for completing the project on a turnkey basis. The joint

venture will have two shareholders: Corsan-Corviam Construccion with 61% share and Soma

Enterprise with 39% share will form the EPC company. The EPC contractor will be paid a

fixed price for time bound completion of the project. The EPC contractor will carry out

design, quality control and overall project management. For carrying out the construction

work, the joint venture will outsource the work to a constructor through an EPC outsourcing

agreement. The outsourced constructor will be 100% owned by Soma Enterprise Ltd.

Exhibit-3: Corporate structure of the project company

39% 10%

51%

Isolux Corsan

Concesiones

Soma Enterprise

(39%)

Corsan-Corviam

Construccion

Soma Isolux (SPV)

EPC Contractor (JV) Corsan Corviam Construccion: 61%

Soma Enterprises: 39%

Outsourced Constructor Soma Enterprises: 100%

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The joint venture of Corsan-Corviam Construccion and Soma Enterprise will be liable for

timely completion of the construction work. The joint venture will provide input during the

design phase and the outsourced contractor, Soma Enterprise, will do the construction part of

the Project leveraging its familiarity with local conditions and extensive experience in

implementing NHAI projects.

4.5 Operation and Maintenance

During the construction and operation periods, Soma Isolux will operate and maintain the

project highway in accordance with the concession agreement guidelines. O&M operations

has been divided along four key departments—toll plaza, corridor control, routine road

maintenance, and central control centre. There will be three toll plazas at different locations

on the highway. These plazas will have semiautomatic, automatic, and electronic toll

collection. Each toll plaza will have a plaza manager to manage the day-to-day operations.

5.1 The Financing of the project Company

The project is one of the first road projects of India to use DBFO structure on a revenue-

sharing basis to build roads. Hence, successful implementation of this project would

encourage other projects to follow this model. The project would be financed with a mix of

debt and equity capital with debt part covering 75% of the project cost. The total project cost

has been estimated to be Rs 5000 crore. Exhibit-4 gives the various sources of fund.

Exhibit-4: Sources of Funds

Sources of Funds:

Equity

Amount

1. Isolux Corsan Concesiones Rs 637.5 crore

2. Soma Enterprise Rs 487.5 crore

3. Corsan-Corviam Construccion Rs 125 crore

Debt

1. SBI* Rs 2790 crore

2. ADB A loan $ 100 million

3. ADB B loan $ 140 million

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ADB Loan:

The sponsors approached ADB for financial assistance. The proposed ADB financial

assistance will enable Soma Isolux to raise long-tenor debt financing for the project. This type

of financing is suitable for infrastructure projects but not readily available in the Indian

market. The project is also consistent with ADB‘s 'Country Strategy and Program' (CSP) for

India, which calls for continued infrastructure development assistance in the areas of

transport, energy, and urban infrastructure.

------------------------------------------------------------------------------------------------------

*SBI is the lead arranger for Rs 2790 crore loan.

The proposed ADB assistance comprises of:

ADB A-loan: Under ADB A-loan, up to $100mn will be provided from ADB‘s

ordinary capital resources without government guarantee.

ADB B-loan: Under ADB B-loan, a loan of up to $140mn will be funded by

commercial banks or other financial institutions.

The ADB loan will have a maximum term of 13 years, including a grace period of up to 3

years. It will be repaid quarterly. The loan will carry an interest rate and fees as determined by

ADB‘s Pricing and Credit Enhancement Committee.

The ADB assistance will be subject to getting approvals from Reserve Bank of India and

other government agencies for lending any US dollar-denominated loan. ADB loan was not

sanctioned till the date of writing this case.

SBI Loan

SBI has agreed to be the lead arranger of Rs 2790 crore loan to Soma Isolux. The loan will

have tenure of 13 years and SBI will charge an interest of 12% on this loan.

-------------------------------------------------------------------------------------------------------

ADB provides loans, without government guarantees, to private sector projects and enterprises. When the loan

amount is large, ADB can extend its B Loan to private sector companies or projects. B loans are funded by

commercial lenders with ADB acting as "lender of record".

Although B loans do not provide co-financiers with recourse to ADB for debt service, such loans do enjoy the

same privileges and immunities given to ADB direct loans. These include

* Sharing of ADB's preferred creditor status.

* Access to ADB's projects appraisal and loan documentation to facilitate credit analysis and due diligence.

* Possible reduction in provisioning requirements in the co-financier's home country.

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6.1 Traffic projections

The Project, when completed, will relieve congestion in 114 intersections at different points

on the road through overpasses and vehicular underpasses. The project will also create two

additional lanes which will expand the capacity of the highway. This will result in faster

traffic flow and creation of additional traffic. Surveys were conducted to determine the

current level of traffic on the highway.

There are three toll plazas on the project corridor at Karnal (km 132), Shambhu (km 212),

Doraha (km 296). Future traffic levels will depend on expected population growth, per capita

income growth and the growth of net state domestic products. Tollable traffic and Non-

tollable traffic (exempted) at the existing three toll plazas are presented in the Exhibit-5 (a) to

(c). The technical specifications of the project road are mentioned in Exhibit-8.

The various vehicle types having different size and characteristics have been converted into

passenger car equivalents. Passenger car unit (PCU*) values are presented in table-5.

Table 5: Passenger Car Units corresponding to Vehicle Type

Vehicle Type PCU Vehicle Type PCU

Car 1.0 Auto Rickshaw 1.0

Mini Bus 1.5 Van/Tempo 1.0

Standard Bus 3.0 Agricultural Tractor 1.5

LCV 1.5 Agricultural Tractor & Trailer 4.5

2 Axle Truck 3.0 Animal Drawn 6.0

3 Axle Truck 3.0 Cycle 0.5

MAV 4.5 Cycle Rickshaw 2.0

Two Wheeler 0.5 Others 4.5

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The definition of PCU has been taken from ‗Guidelines for Capacity of Roads in Rural Areas‘ (IRC-64-1990).

Diverted Traffic

The toll collection from the project may be affected due to existence of alternate parallel

roads. The only possible link which could act as threat to the project is NH-10 between Delhi

and Jalandhar.

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6.2 Revenue Projection

The concession agreement provides toll rates to be charged from various users of the project.

Exhibit-7 provides the rate of base fees from the users of national highway (NH-1 from

kilometre 96.00 to km 387.10) upon crossing any of the toll plazas. The amount of fee to be

charged for a particular year will be adjusted for inflation. The toll fee has to be revised once

a year as follows:

Toll fee = Base Fee x (WPI-B / WPI-A) x km for one-way journey

Where, WPI-B = Average wholesale price index for the year ending 31 March preceding the

fee revision date,

WPI-A = Wholesale price index on June 1997 (131.4%)

-----------------------------------------------------------------------------------------

To adjust the toll rate for local traffic, following categories of local traffic have been made:

1. Car, Jeep or Van: There are two subcategories of users:

a) Category 1: It includes residents of villages, towns, cities, industrial units, establishments and self-

employed persons with workplace located within a radius of 10 km of the fee collection booth. They

will be issued a monthly pass for Rs.150.

b) Category 2: It includes residents of villages, towns, cities, industrial units, establishments and self-

employed persons with workplace located within a radius of more than 10 km but up to 20 km of the

fee collection booth. They will be issued a monthly pass for Rs 300.

2. School Bus: A monthly rate of Rs 1,000 will be charged from school buses.

3. Light Commercial Vehicle or Trucks: They will be charged @ Rs 25 per entry for trucks and Rs 15 per entry

for LCV for plying within 20 km of the toll plaza.

4. If a vehicle has to cross the stretch of national highway more than once a day, the concession agreement

provides that the user will have the option to take a daily pass by paying 1.5 times the corresponding rates

computed from Exhibit-7 for a one-way journey. If the vehicle has to use the stretch continuously for the entire

month, the user can get a monthly pass upon payment of charges equal to 30 times those applicable for a single

trip.

The total capital outlay of the project is given in Exhibit-6. The toll revenue projections at

three toll plazas located at Karnal, Shambhu and Doraha is given in Exhibit-9 (a), (b), (c).

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Exhibit-6: Capital Outlay

Year Capital Outlay (Rs crore)

2009 1650

2010 2500

2011 850

Exhibit 7 Rate of Base Fees per Vehicle per One-Way Trip

Exhibit-8: Pavement Composition of Service Road

Pavement Component Thickness (mm)

BC 40

DBM 60

WMM 250

GSB 200

--------------------------------------------------------------------------------------------------

Macadam is a type of road construction pioneered by the Scotsman John Mc Adam in around 1820. This basic

method of construction is sometimes known as water-bound macadam (WBM).

The dense bituminous macadem (DBM) mix consists of coarse aggregate, fine aggregate and filler in suitable

proportions with required binder content. DBM is used for calculating tensile strains at the bottom of the

bituminous layer.

WMM stands for wet mix macadam.

Rate of Base Fees per Vehicle per One-Way Trip (Rs per km)

Category of Revenue

Applicable as on 1st

June 1997

Applicable as on

2005–2006

Car, Passenger Van, or Jeep 0.4 0.6

Light Commercial Vehicle 0.7 1.04

Truck / Bus 1.4 2.08

Multi-Axle Vehicle (>2 axle) 2.25 3.34

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7.1 Concession Agreement

A concession agreement was signed between Soma Isolux (concessionaire) and NHAI on 9

May 2008. It is based upon the standard concession agreement for BOT projects in road

sector in India. It is a DBFO model based upon revenue sharing. This is the first time when

revenue sharing model is used in India for a road project. The concession period is 15 years

starting, 2009. Concessionaire will be collecting the toll for 15 years from the financial

closure in 2009 till the end of the concession period, 2023. The concessionaire will also be

responsible for operation and maintenance of the road during the concession period. At the

end of the period the road will be transferred back to NHAI. The government of India will

carry out all preparatory work, including land acquisition, resettlement and compensation,

right-of-way (ROW). The Project already has over 60% ROW available and the rest will be

acquired soon. Most of the ROW was acquired before, when the two-lane highway was

expanded to a four-lane highway a decade ago. NHAI will procure all applicable permits

relating to environment protection and conservation of sites. It will also secure approval from

the railway authorities to enable the concessionaire to construct road over bridges and under

bridges at grade crossings. The SPV enjoys 100% tax exemption for 5 years and 30% relief

for the next 5 years.

The concessionaire starts collecting tolls immediately after the appointed date on the existing

four-lane toll road while it is constructing the project and will pay concession fee to the

government, for retaining all tolls both during and after construction for the duration of the

concession period.

A number of provisions are made in the concession agreement to facilitate financing (see

exhibit 10) and protect the rights of the lenders. Lenders have been given 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 concession agreement

says that, upon termination caused by force majeure, 90%–100% of outstanding debt will be

paid by NHAI; in the event of termination caused by NHAI default, 100% of the outstanding

debt will be paid by NHAI; in the event of termination because of concessionaire default,

90% of the outstanding debt will be paid by NHAI during the operating period (but none

during the construction period). All financial inflows and outflows of the Project are routed

through an escrow account.

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Exhibit 10: Contractual and Financing structure of the project

NHAI

Concession

Agreement

Soma Isolux NH One

Tollway (SINOTPL)

Banks

Financing

Agreement

Shareholders

Isolux Corsan Concesiones 51%

SOMA 39%

Corsan Corviam Construction 10%

Shareholders Agreement

EPC

Agreement

Users

EPC Outsourcing

Agreement

Outsourced Constructor

SOMA 100%

Outsourcing Agreement

Joint Venture

Corsan Corviam Construction 61%

SOMA 39%

DBFO

Dividends

Fixed Price

Payment

Lump sum, fixed price,

time bound and turn key

basis

Construction

Equity

Premium

Toll

Debt

Debt cost

20

Key features of the concession agreement are:

Project Development and Operations

The concession agreement says that the commercial operations will start only after Soma

Isolux receives the completion or provisional completion certificate from the independent

engineer, appointed by NHAI. The independent engineer will monitor the construction and

operation of the Project and will submit regular periodic reports (at least once a month) to the

NHAI. The NHAI has the right to change the scope of the Project. However, any costs arising

from a change in scope order issued during the construction period and in excess of a ceiling

of 0.25% of the Total Project Costs, will be reimbursed by the NHAI.

Escrow Account

The concessionaire, NHAI, escrow bank and senior lenders will sign an escrow agreement.

The escrow account have to be opened by the concessionaire prior to the date of financial

close and date the concessionaire takes over the project from NHAI (appointed date). All

proceeds of financial package, all toll fees relating to the project highway, all payments by the

NHAI, insurance proceeds, will be deposited by the concessionaire in the escrow account.

The agreement specifies the following order for appropriation of deposits in the escrow

account:

1. All taxes due and payable by the concessionaire

2. All payments relating to construction of the project highway

3. O&M expenses and other costs and expenses incurred by the NHAI and certified by

the NHAI as due and payable to it

4. Concession fee due and payable to the NHAI

5. Monthly proportionate provision of debt service due in an accounting year

6. Premium due and payable to the NHAI

7. All payments and damages certified by the NHAI as due and payable to it by the

concessionaire, including repayment of revenue shortfall loan

8. Debt service in respect of subordinated debt

9. Any reserve requirements set forth in the financing agreements and balance, if any, in

accordance with the instructions of the concessionaire

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Since the revenues will come from the first day of the concession period, the escrow

agreement requires that all fee and any other revenues from the project highway until COD

(commercial operations date) be transferred to an escrow sub-account. Up to the COD of the

deposits received in the subaccount, the money available to Soma Isolux for use would be

subject to the following:

1. Equity of up to 10% of total project costs has been expended by Soma Isolux

2. The disbursement from the sub-account will be the lower of 50% of each debt tranche

disbursed by the senior lenders and funds available in the subaccount.

3. If Soma Isolux is in default in meeting a project milestone, then the fee being collected

and deposited subsequent to the date of such project milestone, will be held in a

separate sub-account (withheld amount account) for each day‘s delay thereafter.

4. If Soma Isolux is in default in meeting the project milestone immediately following

the defaulted milestone, the withheld amount available in the escrow sub-account will

not be released until the defaulted milestones have been achieved and the project

milestone immediately after the latest defaulted milestone, is achieved in time.

5. If Soma Isolux, as certified by the independent engineer to the escrow bank, achieves

the defaulted milestone and also achieves the immediately following project milestone

on schedule, the withheld amount will be disbursed by the escrow bank to the

construction period fee escrow sub-account.

6. If the COD, as certified by the independent engineer to the escrow bank, occurs after

the scheduled six-laning date solely because of concessionaire default, then the

withheld amount and the fee deposited (including interest on both) during the period

between the scheduled six-laning date and the COD will belong to and be disbursed to

the NHAI, and the concessionaire will not be entitled to the same.

Equity Dilution

The concessionaire cannot undertake any change in ownership without the prior approval of

the NHAI. The concession agreement states that the aggregate holding of the existing

promoter‘s consortium members will:

Not decline below 51% during the construction period

Not decline below 33% during a period of 3 years following COD

Should be at least 26% or any lower proportion permitted by the NHAI thereafter until

the end of the concession period.

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The concession agreement also states that any transfer of ownership leading to acquisition of

more than 15% of total equity of the appointed concessionaire or the company holding

directly or through one or more companies the equity of the concessionaire, would require the

NHAI approval from the national security perspective.

Project Milestones

The project has to follow a strict timeline (see exhibit 11) for various milestones to be met.

Various milestones are:

Project Milestone I: on the 365th day from the appointed date, concessionaire should

have commenced construction of the project highway and expended at least 25% of

the total capital cost.

Project Milestone II: on the 730th day from the appointed date, concessionaire should

have commenced construction of all bridges and expended at least 65% of the total

capital cost.

Scheduled Six-Laning Date: concessionaire should have completed six-laning in

accordance with the concession agreement on the 912th day from the appointed date.

If any of the above project milestones are not met within 90 days from the date set forth,

unless such failure has occurred because of force majeure or for reasons solely attributable to

the NHAI, concessionaire will pay damages to the NHAI in a sum calculated at the rate of

0.1% of the amount of performance security for delay of each day until the milestone is

achieved. However, if the project completion date is achieved on or before the scheduled six-

laning date, the damages paid will be refunded by the NHAI to the concessionaire, but

without any interest.

Exhibit 11: Project Timeline

January 2008 Soma Isolux consortium emerged as winning bidder

9 May 2008 The concession agreement signed between NHAI and Soma

Isolux

5 November 2008 Concessionaire is appointed

365th day from the appointed date Project milestone I

730th day from the appointed date Project milestone II

912th day from the appointed date Project milestone III

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30 months from appointed date Construction should be completed

October 2023 Concession period ends

Additional Tollway or Competing Road

The concession agreement contains following provisions to protect the interests of the

concessionaire if traffic is reduced because an additional tollway or competing road is laid.

Neither the NHAI nor any government agency will at any time before the 10th

anniversary of the appointed date, construct or cause to be constructed any competing

road, provided that the average traffic on the project highway in any year does not

exceed 90% of the designed capacity (90000 passenger car units of daily traffic).

No expressway or other toll road would be constructed in between, km 96.00 and km

387.10 for use by traffic at any time before the 10th

anniversary of the appointed date.

Here, additional tollway does not include any expressway 20% longer than the

existing route comprising the project highway.

In case such an additional tollway or competing road is constructed, then the user fee

collected from any vehicle on the additional tollway will at no time be less than 25%

higher than the fee levied and collected from similar vehicles using the project

highway.

In case an additional tollway is opened to traffic between the 10th anniversary of the

appointed date and the end of the concession period, the concessionaire will be

entitled to an additional concession period, which will be equal in to the period

between the opening of the additional tollway and the end of the concession period.

The NHAI will pay compensation to the concessionaire in a sum equal to the

difference between the realizable fee and the projected daily fee until the loss caused

by construction of the additional tollway is recovered.

Target Traffic

The concession agreement provides that the projected traffic on the project highway on 1st

January 2018 will be 69,443 passenger car units (PCU) per day and any variations will lead to

modifications in the duration of the concession period as follows:

For every 1% shortfall, the concession period will be increased by 1.5%, up to 20% of

the concession period.

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For every 1% in excess, the concession period will be decreased by 0.75%, up to 10%

of the concession period.

Design Capacity

If the average daily traffic of PCUs in any accounting year exceeds the designed capacity of

90,000 PCUs on the project highway, and continues to exceed this designed capacity for 3

accounting years thereafter, an indirect political event will be deemed to have occurred and

the NHAI at its discretion may terminate the concession agreement by making a termination

payment.

Traffic Cap

If the average daily traffic of PCUs in any accounting year reaches a level equivalent to 120%

of the designed capacity, the fee levied and collected from the traffic exceeding the traffic cap

will be deemed to be due and payable to the NHAI.

Additional revenue

The concessionaire can collect additional revenue from the commercial advertising, display or

hoarding at the toll plazas, rest areas, bus shelters and telephone booths located on the project

highway if the advertising thereon does not violate the guidelines of Ministry of Shipping,

Road Transport and Highways.

Change in Law

If the concessionaire suffers an increase in costs or reduction in net after-tax return or other

financial burden because of a change in law, the aggregate financial effect of which exceeds

the higher of Rs10 million and 0.5% of the realizable fee in any accounting year, the

concessionaire can notify the NHAI and propose amendments to the agreement so as to place

the concessionaire in the same financial position it would have enjoyed if there had been no

change in law.

Force Majeure

The force majeure events under the concession agreement are classified into following three

categories:

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Non-political force majeure events: in this case NHAI will make a termination

payment to the concessionaire in an amount equal to 90% of the debt due less

insurance cover

Indirect political force majeure events: in this case the termination payment to the

concessionaire will be an amount equal to debt due less insurance cover and 110% of

the adjusted equity.

Political force majeure events: in this case the termination payment to the

concessionaire will be an amount equal to debt due less insurance cover and 150% of

the adjusted equity.

Events of Default and Termination Provisions

If Soma Isolux defaults during construction, then no payments will be made. However if it

defaults during operations then a payment equal to 90% of debt due as on date of termination

less insurance claims, if any, will be made by NHAI to lenders. If NHAI defaults then it will

pay to the concessionaire, debt due and 150% of the adjusted equity.

Substitution Agreement

The lenders‘ representative, on behalf of senior lenders, may exercise the right to substitute

the concessionaire in accordance with the agreement for substitution of the concessionaire to

be entered into among the concessionaire, the NHAI, and the lenders‘ representative, on

behalf of senior lenders. The substitution agreement protects the interests of the lenders, and

in the case of default by the SPV, allows the lenders to substitute the existing SPV by a

selectee (new SPV) for the residual period of the concession agreement on the terms,

conditions, and covenants provided in the agreement.

The president of ADB Mr. Haruhiko Kuroda, was confident of financing the project

after looking at the traffic and revenue projections, analyzing all kinds of risks

associated with the project and how their mitigation was been done. However he felt

that a cost benefit analysis, including a comparison of with and without project

scenarios over the life of the concession period will give a better determination of should

the project be taken up or not.

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References

1. Department of Road Transport and Highways, Ministry of Shipping, Road Transport

and Highways, Government of India. 2008. Annual Report 2007–2008. India.

2. National Highway Authority of India (NHAI).Website page

http://www.nhai.org/roadnetwork.htm accessed on 13th March 2009.

3. National Highway Authority of India (NHAI).website page

http://www.nhai.org/finance.htm accessed on 13th March 2009.

4. Manual of Specifications and Standards for Six Laning of National Highway Public

Private Partnership. Written by Government of India Department of Road Transport &

Highways.

5. Ministry of Shipping, Road Transport & Highways

6. Website of Isolux Corsan group: http://www.isolux.es/ accessed on 13th March 2009.

7. Website of Asian Develoment Bank.

8. Webpage: http://www.adb.org/PrivateSector/finance/com_financing.asp accessed on

13th March 2009.

9. Website of Soma Enterprise Ltd: http://www.somaenterprise.com/ accessed on 13th

March 2009.