Project Finance

A Case Study

On

Panipat–Jalandhar Toll Road Project

Written by:

Deepti Mishra
Mithlesh Jha
Neeraj Kumar Ojha

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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 NHDP Phase NHDP Phase NHDP
Ph. I & II III V Total

Total Length 5,846 7,300 12,109 6,500 31,755

(Km.)

Already 4- 5,719 3,357 711 90 9,877

Laned
(Km.)
Under 127 2,994 1,954 940 6,015
Implementation
(Km.)

Contracts 15 131 31 2 179

Under
Implementation
(No.)

Balance length - 791 9,444 5,470 15,705

for award
(Km.)

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 Rs. 173.93 Cr.
Connectivity and Economic Importance
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

Isolux Corsan Soma Enterprise Corsan-Corviam

Concesiones (39%) Construccion

39% 10%
51%
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
-----------------------------------------------------------------------------------------------------
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

Rate of Base Fees per Vehicle per One-Way Trip (Rs per km)
Applicable as on 1st Applicable as on
Category of Revenue June 1997 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

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.

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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

Shareholders
Isolux Corsan Concesiones 51%
Banks NHAI SOMA 39%
Corsan Corviam Construction 10%
Shareholders Agreement
Premium
Debt

Concession
Debt cost Agreement Equity
Financing
Agreement Dividends
DBFO

Soma Isolux NH One

Tollway (SINOTPL)

EPC
Agreement

Toll Lump sum, fixed price, Fixed Price

time bound and turn key
Payment
basis

Users Joint Venture

Corsan Corviam Construction 61%
SOMA 39%
EPC Outsourcing
Agreement

Construction

Outsourced Constructor
SOMA 100%
Outsourcing Agreement

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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
9 May 2008
5 November 2008
365th day from the appointed date
730th day from the appointed date
912th day from the appointed date
Soma Isolux consortium emerged as winning bidder
The concession agreement signed between NHAI and Soma
Isolux
Concessionaire is appointed
Project milestone I
Project milestone II
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 10 th
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.

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