V.SHIVA PRAKASH

141576

APPRAISAL OF OUTER RING

ROAD(HYDERABAD) PROJECT

INTRODUCTION Hyderabad Urban Development Authority (HUDA) is

currently engaged in developing a 162.38 km long ORR

(Outer Ring Road) to the Hyderabad City connecting

various National Highways and State Highways in and

around the city. It is to be developed in three stages

involving private partnership from the years 2007-2037.

The study is a critical appraisal of the project including

financial analysis, economic analysis,impacting the

viability of the project, risk analysis and stakeholder

benefits.

FINANCIAL ANALYSIS OF THE

PROJECT:

Objectives:

Assessment of the financial viability of the proposed investment in the project

Assessment of the adequacy of the financing plan for the project

Sensitivity analysis of how the project’s returns are impacted as a result of change in project variables

Analysis methodology:

The input data was obtained by the estimates and reports of financial consultant,and interviews with HUDA officials during the study of the project. The analysis considers a time period of 30 years from FY07 to FY37. This includes the initial 5 years of construction from FY07 to FY11.

PROJECT REVENUES:Four major revenue streams were considered namely:

Revenue from value addition charges: HUDA intends to

develop the land adjoining ORR and make it commercially

viable. It is proposed that buyers will pay HUDA for both

the land and the built up space.

Revenue from development of intersection land banks: In

the ORR, there are 10 major intersections where 250

acres of land will be available for commercial development.

HUDA intends to commercially develop these intersections

land banks on a PPP basis. The two potential revenue

streams associated with this is

a) license fees the land/buildings will bring in

b) revenue sharing on the rental income

received wherein HUDA has decided that 3% of its total

CONTD.. Revenue from sale of land for township development:

HUDA intends to develop the land banks in the vicinity

of ORR as independent townships on a PPP basis. 12

Areas have been planned to be sold to developers for

township development between FY08 and FY12. The

townships derive value only because of ORR, and so

revenues from sale of land for township development

are included in the financial model. The year wise

sales schedule and potential revenue generated are

shown in the excel sheet. The basic assumptions

regarding development expenses incurred is 10% of

sales value and capital gains taxes to be paid are

20% of gains after reducing development expenses.

These will be deducted from gross revenue and net

revenue is calculated.

CONTD..

Toll Revenues: The Government is favorable to implement

toll collection at a future date. But currently the possibility

is

an uncertainty due to present political compulsions. Hence

toll

revenues are not considered for the financial model as a

conservative measure.

CONTD..

COSTS:The cost heads are classified into two major categories

a)Initial capital costs

b) Subsequent Annual maintenance costs and fixed obligations

Initial Capital Costs: Falls under two heads further

a) Construction Costs and

b) Relief and rehabilitation costs

Fixed Compulsory Expenses: Falls under two heads

a) BOT Annuity to private partner and

b)Maintenance to be incurred by HUDA

RESULT

The NPV of the project works out to be INR 542 crore

using base costs and assumptions. The project can be

financially viable provided it is completed as per

project plan and the initial costs and revenue

estimates.

The IRR computations is 218% .This is not a a

reliable figure, because of multiple changes in cash

flows.

ECONOMIC ANALYSISRELIEF AND REHABILITATION ECONOMIC ANALYSIS

Construction of the ORR will lead to the displacement of several families living in the affected area. HUDA has announced the Relief and Rehabilitation measures for those individuals and families that are affected by the ORR project

Cost – Benefit analysis of R&R:

Agricultural and vacant land-owners and encroached/assigned

land losers:

All owners of agricultural or vacant land are entitled to a

cash compensation of 180% of the approved land rate (LAO). In the case

of a landowner losing 80% or more of his/her land holdings due

to acquisition by HUDA, they are entitled to a developed plot

of approximately 360 sq. ft. per acre lost.

COSTS

The economic value of the land was calculated by

considering the annual revenues obtained from

the land as perpetuity, and thereby calculating the

value of the land based on a 12.5% rate of

interest on the perpetuity. The per acre cost of

land for each village based on both the methods

described above were compared, and the higher

cost was taken as the per acre cost of land in

each village. In this manner the total economic

costs of the land lost by project affected families

across all affected villages were calculated.This

cost was estimated to be INR 240 crore.

BENEFITS

The benefits for agricultural and vacant landowners who

were displaced were two-fold. First, a cashcompensation

of 180% of the market value of the land inclusive of a

42% solatium was paid to each of the affected landowners.

In addition, it was assumed that 20% of the landowners whose

lands were acquired would lose 80%or more of their

land holdings – a conservative estimate from the

Stake holder’s perspective.

The NPV arrived at was INR266.5 crore, indicating that the compensation awarded to this group of affected families was well in excess of the losses incurred.

OVERALL ANALYSIS AND

RECOMMENDATIONS:

The study is based on the data provided at a stage

when HUDA was trying to attract JICA, a

multilateral lending agency for investing in phase

2B of the project.

The financial analysis shows a positive NPV

which is based on many assumptions of revenue

inflow, which are highly sensitive to changes in

variables. To attract an investor in such a

scenario would require strong Government

Commitment to pay off the annuity.

CONTD..

The IRR in the financial flow again is based on

varied cash flows that could be misleading since

these are based on projections subjected to

change in political environment

E.g.: In ORR, an agitation over Telangana can

make the law and order vulnerable and the

project could be stalled, the townships sales need

not take off, the expected percentage value

additions could be less etc