Chapter 1 INTRODUCTION 1.

1 Introduction

Infrastructure represents the wheels of economic activity. People demand infrastructure facilities not only for direct utilization but also for raising their productivity. It contributes to economic growth both by increasing productivity and by providing amenities which enhance the quality of life. There is a strong association between the availability of infrastructure facilities such as telecommunications, power, roads & access to safe water and per capita GDP. Adequate quantity & reliability of infrastructure are key factors in the ability of countries to compete in international trade, even in traditional commodities. In the post-World War II era around 1945, most infrastructure projects in developing countries have been built under the direct supervision of the government itself, or of a government agency. But In early 1980s government started to find the alternative ways to finance these projects because of the following reasons : 1. With continued population and economic growth in many developing countries, the need for additional infrastructure continues to grow. 2. The growing third World debt crisis has meant that developing countries have had less borrowing capacity and fewer budgetary resources of their own to finance the projects that are needed. 3. Limited resources of government & government agencies. Government agencies are looking for creative ways to promote additional projects by encouraging private sector enterprise, apart from shifting a portion of burden of the infrastructure development, including financial arrangements to the infrastructure development. Beginning in the late 1970s and early 1980s, some of the major international contracting firms and some of the more sophisticated developing countries began to explore the possibility of promoting privately owned and operated infrastructure projects financed under a concession type arrangement. One of the variant under this category is BOT (Built, Operate & Transfer). Other variants include: BOOT (Build, Own, Operate and Transfer); BOO (Build, Own and Operate, i.e., without any obligation to transfer); BRT (Build, Rent and Transfer); BOOST (Build, Own, Operate, Subsidize and Transfer). BOT (Build- Operate- Transfer): Build-Operate-Transfer (BOT) is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facility for a specified period, often as long as 20 or 30 years. After the concession period ends, ownership is transferred back to the granting entity.

During the concession the project proponent is allowed to charge the users of the facility appropriate tolls, fees, rentals, and charges stated in the concession contract. This enables the project proponent to recover its investment, operating and maintenance expenses in the projects.

1.2 Need of Study:

Infrastructure projects need massive investment, have long gestation period, yield small and in some cases negative returns, Thus entry of private sector in infrastructure financing and development must be well conceived. As more & more infrastructure projects in developing countries are developed on the basis of BOT model, therefore its various financial & contractual aspects must be analysed in detail.

1.3 Aim of Present Study:

To establish procedural guidelines & framework for the financial & contractual aspects for the realization of BOT model for Highway projects.

1.4 Research Objective:

To study the BOT model in Public- Private Partnership mode of development in Road projects. What are the various risks involved in the BOT model for Road projects & how these risks are incorporated in Concession agreement and financial analysis of projects? To develop standard model for contractual & financial analysis of BOT Road projects.

1.5 Scope:
Brief introduction of infrastructure projects & its need. Development of infrastructure projects through BOT & its main differences from conventional model. To study the evaluation of BOT model in Highway projects To study the various risks involved in the BOT model of Highway projects and what are various risk mitigation techniques. To study the contractual aspects of BOT Highway projects and how various risks are incorporated in the concession agreement. To study the financial aspects of BOT Highway projects and how to analyze the financial viability of projects while incorporating various risks involved in the project. To develop standard models for the Contractual & financial analysis of Road projects to be develop on BOT basis.

1.6 Methodology:
Present study explores case studies available in India and some other developing country in which BOT contracts have been used in various Highway sector. The study mainly covers the important issues related to financial & contractual aspects of concerned projects.

Need

Aim & Objectives

Inputs from Books Journals Seminars NHAI & Most websites

1. Infrastructure, meaning types, characteristics & other aspects. 2. Privatization of infrastructure. 3. BOT concepts& applications. 4. Risk management in BOT road project. 5. Financial & Contractual aspects of Road projects on BOT Analysis

Inputs from NHAI IL & FS Private Firms

Develop Contractual & Financial Analysis Model

Figure1.1: Flowchart for Methodology

1.7 Literature Review

Various researchers have examined the various risks involved in the BOT model for infrastructure projects and methods to incorporate the risks involved in concession agreement and financial analysis of projects. Some of the studies done in this field are as follows: i. K. N. Vaid (1997) carried out various characteristics of Infrastructure projects, its impact on communities and various reforming options. Infrastructure services- including the power, transport, telecommunications, and provisions of water and safe disposal of waste- are central activities of households and economic production. Infrastructure failures quickly and radically reduce communities quality of life and productivity. Conversely improving infrastructure services enhances welfare and fosters economic growth. R. Bharadwaj (1997) proposed the devise into three parts. First part discussing the present state of infrastructure in India, Second part discussed with the projected growth of

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infrastructure need and the third part look into the investment need for infrastructure development. iii. Tercia Arambam (1999) studies the various factors involved in the analysis of BOT model for infrastructure projects. The work has been divided into two parts, one is privatization of infrastructure projects & other one is BOT concepts & issues. Ajeet K Chaudhry (2001) studied the key issues involved in the development of Indian road sector. He concluded various sections discussing the problems in Indian road traffic, NHDP & Toll & Annuity model for project development. Kulwinder Singh Rao (2004) carried out the various procurement methods involved in the development of Indian road sector. He concluded into two major parts; first part discussing the PPP in Indian road sector and other part discussing the selection procedure and bid evaluation criteria. Sudong Ye and Yisheng Liu (2008) proposed that the infrastructure development can be abstracted into development patterns. Based on the findings, they investigated possible task allocations between public and private sector to build a development decision tree of infrastructure projects. Sudong Ye and Yisheng Liu (2008) studied the finance approach, the debt service payment relies solely on project cash flows and the assets of the toll road projects. They evaluated, quantified and identified the major financial risks associated with project- financed toll road projects. Young Hoon Kwak (2008) studied a detailed overview of Asian concession market, 87 concession projects awarded between 1985 and 1998 covering 12 Asian countries were examined . The concession agreement is one of the infrastructure privatization models. In Asia, the rise of concession projects began in the 1980s, and the number of such projects continues to grow.

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1.8 Contribution of the Current Study to the Existing Literature

The BOT scheme to financing infrastructure projects has many potential advantages and is a viable alternative to the traditional approach using sovereign borrowings or budgetary resources. BOT projects involve a number of elements, such as host government, the Project Company, lenders, contractors, suppliers, purchasers and so on. All of which must come together for a successful project. The application of the BOT scheme in Indian infrastructure development is being carried out stage by stage. There are two broad categories of risk for BOT projects: country risks and specific project risks. The former associated with the political, economic and legal environment and over which the project sponsors have little or no control. The later to some extent could be controllable by the project sponsors.

A few researches of risk management associated with Indias BOT projects focused on a particular sector. Different researchers appear to have different points of view on risk identification because they have approached the topic from different angles. A particular risk should be borne by the party most suited to deal with it, in terms of control or influence and costs, but it has never been easy to obtain an optimal allocation of risks. Risk Management is a critical success factor of BOT projects.