Feasibility Analysis of Highway Sector in India through Comparative Analysis of Concessionaire Models

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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:

  1. Future cash flows based on toll revenue.
  2. Computing IRR for discounting returns.
  3. Computing the present worth of the expected future returns.
  4. 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

  1. Motor Cycle or Scooter 0.5
  2. Passenger Car, Pick-up Van or Auto-rickshaw 1
  3. Agricultural Tractor, Light Commercial Vehicle 1.5
  4. Truck or Bus 3
  5. Truck-trailer, Agricultural Tractor-trailer 4.5 Slow Vehicles
  6. Cycle 0.5
  7. Cycle-rickshaw 2
  8. 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.

References

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Feasibility Analysis of Highway Sector in India through Comparative Analysis of Concessionaire Models. (2022, August 12). Edubirdie. Retrieved July 16, 2024, from https://edubirdie.com/examples/feasibility-analysis-of-highway-sector-in-india-through-comparative-analysis-of-concessionaire-models/
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