Abstract—
Investment in government infrastructure projects plays an important role in effective advancement and development of the country. However large scale highway development projects increases financial and budgetary burden on the government bodies. Therefore Public private Partnership (PPP) was introduced which gives an opportunity to private sector to invest in infrastructure project. Willingness of private sector to participate in investment of infrastructure projects depends upon financial and economic analysis of that project, which draws the viability in terms of benefits in near future as well as throughout the project lifecycle. This paper aims to study various concessionaire models available for financing a proposed national highway in India by carrying out the feasibility analysis of the project. It is necessary to compare all the models for highway project financing which will provide maximum returns on investment over a shortest period of time. Net Present Value (NPV) method of investment analysis is used where project will be compared in terms of present value of future returns, Internal Rate of Return (IRR) and payback period of the project. At the end through comparative analysis of concessionaire models, BOT annuity + VGF showed highest Internal Rate of Return 14.90% within concessionaire period of 30 years.
Keywords— Public Private Partnership (PPP), Net Present Value (NPV), Internal Rate of Return (IRR).
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Introduction
India has prerequisite of project of worth Rs. 50 trillion and role of private segment investment has picked up part of significance to have economical improvement of nation.There is an enormous interest on public infrastructure and development worldwide though the development spending plan of any nation is constantly restricted [1].
In India, the road projects are awarded using one of Model such as Built, Operate & Transfer (BOT) Toll Model, BOT Annuity Model &Engineering, procurement & construction (EPC) Model. Also the new advanced version of model concession agreement is introduced which is HAM (Hybrid Annuity Model). Previously, the money related and hierarchical assets of open authorities assumed an imperative job in financing expressway foundation projects [2]. In this study present concessionaire models in India were studied. The selection of appropriate concessionaire model is crucial for successful completion of project. Concessionaire modeling plays a primitive role in evaluation of projects for making project financing decisions by both the lenders and equity investors. In project finance, the funding agencies look into the expected future cash flows in relation to the amount of the initial investment while making the investment decision. Equity investors used financial model to evaluate the returns from the project in order to ascertain their adequacy. On the other hand, financial model was used by lenders to know the level of cover for their loans and the timeliness of project debt service payments.
The Net Present Value (NPV) method of investment analysis was utilized for selection of concessionaire model. NPV method uses the concept of discounted cash flow analysis for the evaluation. The NPV strategy as a project evaluation or capital budgeting procedure demonstrates how an investment in project influences organization investors' riches in present worth terms [3]. The typical steps in discounted cash flow analysis involve:
- Future cash flows based on toll revenue.
- Computing IRR for discounting returns.
- Computing the present worth of the expected future returns.
- Compare whether the project is worth more than its cost.
The numerous parameter required in NPV method were identified which are required for decision making of concessionaire. The comparative analysis for different concessionaire model was performed based on results obtained with NPV model. The simulation of parameters was developed over the concession period. The model was selected with maximum returns on investment over concession period. The model selected based on its feasibility analysis for a new highway project that will be undertaken.
Road investment decision making parameter
The various parameters for decision making are as follows:
- A. Net present value (NPV)
- B. Internal rate of return (IRR)
- C. Viability Gap funding (VGF)
- D. Payback Period
A. Net Present Value (NPV)
Usually NPV is used for capital budgeting and planning for the investment to study the effectiveness of the project. All possible values of cash flows expected to occur over life span of project including positive as well as negative were considered under NPV. (Changed just go through once)
NPV of project =
Ct is the cash flow at the end of year t, n is the life of the project and r is the discount rate. The NPV represents the benefit above and over the compensation for time and risk.
Hence decision rule associated with the net present value criterion is accept the project which is having positive NPV and reject the project which is having negative NPV. (Need to reframe sentence is tooo lengthy )
B. Internal rate of return (IRR)
Internal rate of return of a project is the discount rate which makes its NPV equal to zero. Put differently, it is the discount rate which equates the present value of future cash flows with the initial investment. It is the value of r in the following equation.
Investment =
Where Ct is the cash flow at the end of the year t, r is the internal rate of return (IRR), and n is the life of the project. In the NPV calculation we assume that the discount rate (cost of capital) is known to determine the NPV. In the IRR calculation we set the NPV equal to zero and determine the discount rate that satisfies this condition.
Generally speaking, the higher a project IRR, the more desirable is to undertake the project.
IRR represents the time adjusted earnings over project life. It is that rate that equates the present value of cash inflows to the present value of cash outflows of the project. Or in other words, the discount rate that set sets NPV of cash flows to zero. Direct cost of project and benefits are calculated by investor’s point of view in IRR.
C. Viability Gap Funding (VGF)
Viability gap funding implies one time award or grant, gave to help infrastructure projects which are economically suitable but yet miss the mark of financial viability. The lack of financial viability for most part emerges on account of long construction periods and the inability to increase user charges into commercial levels. Infrastructure project likewise include different externalities which are not sufficiently shrouded in direct financial returns to the project sponsor.
Government of India has notified a scheme for viability gap funding to infrastructure projects that are to be undertaken through public private partnership. The quantum of VGF provided under this scheme is in the form of capital grant at the stage of project construction.
Designation of Cess Revenues for Viability Gap Funding
The average viability gap funding has been assumed as 30% of the project cost. The maximum in selected cases can go up to 40% of the project cost.
Allocation of cess revenues by the Government for funding the annual plan outlays of NHAI may be split into two parts viz. (a) PPP component, and (b) EPC, O&M and Misc. component.
D. Payback period
The payback period is the period of time required to recoup the underlying money cost on the project. If the annual cash inflow is a constant sum, the payback period is simply the initial outlay divided by annual cash inflow. According to payback criterion, the shorter the payback period, the more desirable is the project. Firms using this criterion generally specify the maximum acceptable payback period. If this is n years, projects with payback period n or less are deemed worthwhile and projects with payback period exceeding n years are considered unworthy. (Need to change)
Data collection
Traffic flow or volume is measured in terms of number of vehicles per unit time. The common units of time are day and hour. Thus the flows are measured in terms of vehicles per day or vehicles per hour. Daily traffic volume is denoted by the term ADT or AADT. ADT (Average Daily Traffic) is the value when traffic counts are taken for a limited period of say 3-7 days, and the daily average determined. AADT (Annual Average Daily Traffic) is the value when traffic counts are taken for all the 365 days of the year and the daily average determined.
Since Indian traffic is heterogeneous, the traffic is converted in terms of passenger car units (PCUs).
Table i
Passenger car unit (pcu)
Source: irc 106:1996
Vehicle type
Equivalence factor
Fast Vehicles
- Motor Cycle or Scooter 0.5
- Passenger Car, Pick-up Van or Auto-rickshaw 1
- Agricultural Tractor, Light Commercial Vehicle 1.5
- Truck or Bus 3
- Truck-trailer, Agricultural Tractor-trailer 4.5 Slow Vehicles
- Cycle 0.5
- Cycle-rickshaw 2
- Hand Cart 3
Traffic volume data for project
The annual average daily traffic volume is collected and increased for traffic growth by 5 % each year as per guidelines given in “Financing Plan of National Highways”.
Table ii
Average annual daily traffic (aadt)
Type of vehicle
2 Wheeler
3 Wheeler
Car/ Jeep
LCV
Mini Bus
Trucks
(2-Axel)
Private Bus
Govt. Bus
Trucks
(3-Axle)
MAV
PCU factors
0.5
1
1
1.5
1.5
3
3
3
3
4.5
Growth for existing traffic
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Growth for proposed traffic
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
AADT
3,338
1,211
267
251
320
55
85
180
195
280
Toll revenue
WPI termed as whole sale price index is an index that track and measures the changes in the price of goods before the retail level(Retail level is level in which goods are sold in bulk and traded between business instead of consumers). WPI is expressed in percentages of ratio. It indicates average change in price which is seen as an indicator of country’s inflation level.
Table iii
Base rate for different class of vehicles
Source: the gazette of india, part 2, section 3, sub section 1
Class of Vehicle
Car, Jeep, Van or LMV
LCV, LGV, Mini bus
Truck, Bus
3 Axle
4 to 6 axle / HCM
O/S vehicles
Base Rate (%)
0.65
1.05
2.2
2.4
3.45
4.2
The base rate is increased by 3% for every year.
Example for evaluating Toll rates is given below:
If base rate for 2008-09 for car, jeep and van is 0.6695, and WPI for 2007 is 208.70 and for 2008 is 218.58, then base rate for toll fee working is calculated as below:
Financial plan for national highway project – a case study
Modes of delivery for highway projects:
In this research, following modes of delivery of project are identified in order of priority:
- A. BOT (Toll) without VGF
- B. BOT (Toll) With VGF
- C. BOT (Annuity)
- D. Hybrid annuity model (BOT Annuity plus VGF)
- E. EPC
All highways which are to be tolled should adhere to the BOT (Toll) mode in accordance with the extant framework approved by CoI/ Cabinet, especially a cap of 40% on the grant element.
Data and Assumptions
The case study of national highway of project was considered for financial analysis of project. The construction of highway takes number of years and similarly maintenance and operation is carried out over period of time. Phase cost of project was calculated up to 328.71 corers. Construction cost in first year is 40% of phase cost and 60% of phase cost in second years. It was assumed that annual maintenance is 1% of phase cost of project and periodic maintenance was assumed to 6 % of phase cost of project. The routine operation and maintenance cost is 3.29 crores and periodic maintenance is 19.72 crores which is calculated over period of 5 years.
The costs of construction, annual maintenance and periodic maintenance are added with inflation of 5% over the concession period for each year. It was also assumed that 5% of yearly toll revenue will be spent on operations of toll plaza.
In respect of annuity projects, IRR has been considered @ 15% per annum for the purpose of calculation of annuity payments as per guidelines given “Financial plan for national highway development programme”.
A. BOT toll without VGF
In initial case it was assumed that no VGF will be provided by government. The cash flow was generated over the concession period of 30 years and IRR was calculated for same. The cash outflow includes costs like cost of construction, annual maintenance, and periodic maintenance.
Option with IRR of 14.90 % is considered viable for financial planning of the project.
Table iv
Cash outflow for bot model without vgf
Year
Construction cost (Cr)
VGF
Inflation
Current Construction Cost (Cr)
Current Annual Maintenance (Cr)
Current Periodic Maintenance (Cr)
Total Outflow (Cr)
5%
With inflation
With inflation
2019
2020
1.22
0.00
4.00
0.00
4.00
2020
2021
1.28
0.00
4.20
0.00
4.20
2021
2022
1.34
0.00
4.41
0.00
4.41
2022
2023
1.41
0.00
4.63
0.00
4.63
2023
2024
1.48
0.00
4.86
29.14
34.00
2024
2025
1.55
0.00
5.10
0.00
5.10
2025
2026
1.63
0.00
5.35
0.00
5.35
2026
2027
1.71
0.00
5.62
0.00
5.62
2027
2028
1.80
0.00
5.90
0.00
5.90
2028
2029
1.89
0.00
6.20
0.00
6.20
2029
2030
1.98
0.00
6.51
39.05
45.56
2030
2031
2.08
0.00
6.83
0.00
6.83
2031
2032
2.18
0.00
7.18
0.00
7.18
2032
2033
2.29
0.00
7.53
0.00
7.53
2033
2034
2.41
0.00
7.91
0.00
7.91
2034
2035
2.53
0.00
8.31
0.00
8.31
2035
2036
2.65
0.00
8.72
52.33
61.05
2036
2037
2.79
0.00
9.16
0.00
9.16
2037
2038
2.93
0.00
9.62
0.00
9.62
2038
2039
3.07
0.00
10.10
0.00
10.10
2039
2040
3.23
0.00
10.60
0.00
10.60
2040
2041
3.39
0.00
11.13
0.00
11.13
2041
2042
3.56
0.00
11.69
70.13
81.82
2042
2043
3.73
0.00
12.27
0.00
12.27
2043
2044
3.92
0.00
12.89
0.00
12.89
2044
2045
4.12
0.00
13.53
0.00
13.53
2045
2046
4.32
0.00
14.21
0.00
14.21
2046
2047
4.54
0.00
14.92
0.00
14.92
2047
2048
4.76
0.00
15.66
93.98
109.64
2048
2049
5.00
0.00
16.45
0.00
16.45
2049
2050
5.25
0.00
17.27
0.00
17.27
2050
2051
5.52
0.00
18.13
0.00
18.13
2051
2052
5.79
0.00
19.04
0.00
19.04
TABLE V
CASH INFLOW FOR BOT MODEL WITHOUT VGF
Year
Annuity
Toll Revenue (Cr)
Toll Collection Charges
Total inflow (Cr)
5% of toll revenue
2019
2020
0.00
6.74
0.34
6.40
2020
2021
0.00
7.48
0.00
7.48
2021
2022
0.00
8.30
0.42
7.89
2022
2023
0.00
8.99
0.45
8.54
2023
2024
0.00
10.00
0.50
9.50
2024
2025
0.00
11.04
0.55
10.49
2025
2026
0.00
12.31
0.62
11.69
2026
2027
0.00
13.28
0.66
12.61
2027
2028
0.00
14.82
0.74
14.08
2028
2029
16.31
0.82
15.49
2029
2030
18.05
0.90
17.15
2030
2031
19.87
0.99
18.87
2031
2032
21.95
1.10
20.85
2032
2033
24.58
1.23
23.35
2033
2034
27.02
1.35
25.66
2034
2035
29.70
1.49
28.22
2035
2036
32.67
1.63
31.04
2036
2037
36.50
1.83
34.68
2037
2038
40.01
2.00
38.01
2038
2039
44.53
2.23
42.30
2039
2040
49.44
2.47
46.97
2040
2041
54.84
2.74
52.10
2041
2042
60.71
3.04
57.67
2042
2043
67.08
3.35
63.73
2043
2044
73.99
3.70
70.29
2044
2045
81.87
4.09
77.78
2045
2046
90.34
4.52
85.82
2046
2047
100.50
5.02
95.47
2047
2048
111.44
5.57
105.87
2048
2049
123.69
6.18
117.51
2049
2050
137.20
6.86
130.34
2050
2051
151.74
7.59
144.16
2051
2052
168.01
8.40
159.61
Net cash flow was calculated with difference of outflow minus inflow. Then IRR was calculated by setting NPV to zero, which was found to be 3.73%.
Table VI
NPV and IRR for bot model without VGF
From to
Years
Net cash flow (Cr)
NPV (Cr)
Considering
Interest=3.73%
2019
2020
2
-2.40
-2.15
2020
2021
3
-3.29
-2.84
2021
2022
4
-3.48
-2.90
2022
2023
5
-3.91
-3.14
2023
2024
6
24.49
18.95
2024
2025
7
-5.39
-4.02
2025
2026
8
-6.34
-4.56
2026
2027
9
-6.99
-4.85
2027
2028
10
-8.18
-5.47
2028
2029
11
-9.29
-5.99
2029
2030
12
28.41
17.65
2030
2031
13
-12.04
-7.21
2031
2032
14
-13.68
-7.90
2032
2033
15
-15.82
-8.81
2033
2034
16
-17.75
-9.53
2034
2035
17
-19.91
-10.30
2035
2036
18
30.01
14.97
2036
2037
19
-25.52
-12.27
2037
2038
20
-28.39
-13.16
2038
2039
21
-32.20
-14.39
2039
2040
22
-36.37
-15.67
2040
2041
23
-40.97
-17.01
2041
2042
24
24.15
9.67
2042
2043
25
-51.45
-19.86
2043
2044
26
-57.40
-21.36
2044
2045
27
-64.25
-23.04
2045
2046
28
-71.62
-24.76
2046
2047
29
-80.55
-26.85
2047
2048
30
3.77
1.21
2048
2049
31
-101.06
-31.31
2049
2050
32
-113.07
-33.77
2050
2051
33
-126.03
-36.28
2051
2052
34
-140.57
-39.02
IRR
3.73
B. BOT toll with VGF
In This case it was assumed that VGF will be provided by NHAI. The VGP of 40% of total phase cost is given by NHAI in two stages in 2016-17 and 2017-18. The cash flow was generated over the concession period of 30 years and IRR was calculated for same. The cash outflow includes costs like cost of construction, annual maintenance, and periodic maintenance.
Option with IRR greater than 14 % is considered viable for financial planning of the project.
Net cash flow is calculated with difference of outflow minus inflow. Then IRR was calculated by setting NPV to zero, which was found to be 5.73 %.
C. BOT with annuity
Highway projects which are not amenable to BOT (Toll) mode, including projects which are not to be tolled under Government policy, should be undertaken on BOT (Annuity) mode. In this case it was assumed that NHAI would start payment to concessionaire as soon as project was started. The annuity is provided on total phase cost i.e. on 328.71 Cr.
The annuity is calculated using capital recovery of economic analysis:
A= 98.06 Cr
The annuity of 98.06 is provided over the period of 5 years from the commencement of project. The cash flow was generated over the concession period of 30 years and IRR was calculated for same. The cash outflow includes costs like cost of construction, annual maintenance, and periodic maintenance.
Net cash flow is calculated with difference of outflow minus inflow. Then IRRwas calculated by setting NPV to zero, which was found to be 13.94 %.
D. BOT with annuity plus VGF
Highway projects which are not amenable to BOT (annuity) mode, including projects which are not to be tolled under Government policy, should be undertaken on BOT (Annuity plus VGF) mode .In this case it was assumed that NHAI would start payment to concessionaire as project is started as well as VGF of 40 % of phase cost which was 131.48 Cr is provided in two stages. Annuity is provided over period of 5 years on remaining 60% phase cost which is 197.23 Cr.
The annuity was calculated using capital recovery of economic analysis:
A= 58.83crores
The cash flow was generated over the concession period of 30 years and IRR was calculated for same. The cash outflow includes costs like cost of construction, annual maintenance, and periodic maintenance.
Net cash flow was calculated with difference of outflow minus inflow. Then IRR was calculated by setting NPV to zero, which was found to be 14.90 %.
Table VII
Summary sheet of IRR and NPV for different cases of financial model
S.N.
Option
Project cost (Cr)
Grant 40% (Cr)
Annuity for period of 5 years (Cr)
IRR (%)
NPV (Cr)
Concession period
1 BOT-Toll without VGF
328.71
3.73
-0.18
30 years
2 BOT-Toll with VGF
328.71
131.38
5.73
-0.21
30 years
3 BOT- Annuity
328.71
98.06
13.94
-0.05
30 years
4 BOT-Annuity+VGF
328.71
131.38
58.83
15
0.01
30 years
Results
The results of four models are summarized as below: Options 1 and 2 have NPV closer to zero, but do not satisfy the minimum criterion of IRR which is 15%. From the result illustrated in Table VII,it can be seen that IRR becomes maximum in BOT (Annuity + VGF).It can be seen that corresponding NPV becomes zero, also the IRR value is greater than 14% which makes project financially viable. So it can be clearly suggested that option provided with payment given by NHAI in form of annuity and NPV of 40% can be more financially stable as compared to other option.
Conclusion
The concessionaire models that have been used in current scenario in India are studied. The cash flows for different cases are created which affects different concessionaire models. The financial viability of highway project through comparative analysis of different concessionaire models is studied. On basis of study conducted on case study of highway project’s for financial feasibility, it has been concluded that, out of different models of highway finance, the most suitable model to get return on investment is BOT (Annuity + VGF) with Internal Rate of Return of 14.90% and concessionaire period of 30 years. The proposed model resembles Hybrid Annuity Model for financing the project.
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