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Public Private Partnership: Vadodara-Halol Toll Road: Case Study 07 November 2013

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Case Study 07 November 2013

Public Private Partnership: Vadodara-Halol Toll Road


Project Description Rs. 93.2 cr. through various Indian and foreign
financial institutions including the World Bank.
Vadodara Halol Toll Road Company Ltd. was a
company constituted and promoted by Gujarat After signing the MoA, a consulting firm was selected
government for developing and implementing by GoG and IL&FS through a competitive bidding
Vadodara Halol Road Project under Built, Own, process and commissioned to undertake a preliminary
Operate and Transfer (BOOT) method. This has been a technical-economic feasibility study. Based on the
flagship project by the Gujarat government for findings of this study, GoG approved widening and
fulfilling its Vision 2010- an infrastructure master plan strengthening of the existing two lane road to four
developed by the government, which consequently with the provision of service roads. Investment
paved way for similar projects being undertaken by recovery was recommended in the form of toll
the governments in the rest of India. The underlying collection. The development of the 31.7km stretch
principle of the vision was to develop infrastructure was achieved in a single phase with all the required
projects in Gujarat by attracting private sector road works and release facilities being developed.
participation. The project involved widening and While the concessionaire was to ensure completion of
strengthening of 32 kilometres (km) of the existing all works within a period of 18 months, the
two-lane State Highway (SH 87) connecting Vadodara construction of the entire stretch was completed 4
to the industrial town of Halol into a four-lane tolled months ahead of schedule.
expressway. The construction of VHTR commenced on
One of the key features of this project was its
1st March 1999 and completed on 15th September
Environmental and Social Impact Assessment and
2000. The toll operations commenced on 24th
Mitigation plan which estimated around 300 families
October 2000. VHTRL manages, operates and
to be affected by this project. A systematic analysis of
maintains the road for 30 years starting from 2000.
various alternatives was undertaken and bypasses
PPP Structure of the project were introduced at various critical locations. The
extent of resettlement was hence reduced and
The Vadodara Halol Toll Road (VHTR) project was
resulted in the resettlement of only 10 project
developed by means of constituting a special purpose
affected households. VHTRL also undertook voluntary
vehicle (SPV) - Vadodara Halol Toll Road Company Ltd.
relocation of temples, schools and environmental
(VHTRL). It entered into a concession agreement with
infrastructure. It also created additional facilities such
the Gujarat government to design, finance, build,
as pedestrian subways and compound walls and
operate, maintain and transfer the facility after
provided additional houses for the relocation of
recovery of a predetermined return. VHTRL appointed
communities. This project was in fact designated by
Punj Lloyd and IRCON International Ltd. as contractors
the World Bank as a best practice example for its
to construct, operate and maintain the project.
environment risk mitigation and social rehabilitation
The Government of Gujarat (GoG) commissioned plan in India amongst World Bank assisted projects.
Infrastructure Leasing and Financial Services (IL&FS) to
The work of the project was completed by September
jointly promote and develop Vadodara-Halol project
2000 and the operations commenced in October
and entered into a MoA to this effect. The cost of the
2000. The contract made provision for five major
project was Rs. 161 cr. of which the construction cost
items of operations and maintenance during the life
accounted for approximately Rs, 119 cr. Equity of Rs.
of the project. These were:
67.9 cr. was raised from GoG, IL&FS, and the
consortium of contractors. IL&FS also raised debt of a. Routine Maintenance (continuous)

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b. Periodic Overlay (every five year) concession agreement ensured that the private
developer earned toll revenues till he was able to
c. Periodic Renewal (every fifteen year)
achieve a return of 20% on the overall investment.
d. Toll operation and management (once a year) This was further protected with a provision for
The concession period will end in 2030. However, in additional revenues i.e. development rights on
case the developer is unable to recover project cost land parcels abutting the road, in case the toll
and earn a return, there is a possibility of extension of revenues did not result in the expected returns.
the concession period. The typical extension allowed There was also an annual toll revision linked to
under the Concession Agreement is for two years. This wholesale price index/consumer price index to the
is a rolling period, which means that the concession extent of 100% of the rates which resulted in the
period will keep extending by two years till the time developer having an assured revenue stream.
the Concessionaire is able to gain a return of 20% on Further, the lack of penal provision for non-
the investment. compliance with performance standards during
operation and maintenance meant that the
Key Lessons developer could save on costs if desired. Adverse
The case study provides several insights that need to effects of Change in Law, occurrence of a Force
be highlighted so that lessons can be drawn and Majeure event, unexpected increase (more than
applied to other projects as well. 25%) in the estimated costs of any maintenance
expenditure, interest rates fluctuations, inflation
Assessment of market is critical: The VHTR case exceeding 50%, were all made pass through to the
makes it amply clear that the pre-development consumers.
preparations need to be more robust since such
preparations can impact the long term objectives Environmentally and Socially responsive
of the project. For instance, the traffic estimations development framework: The VHTRL was the first
for the project were based on the assumptions project that introduced Environmental and Social
that the industrial incentives available for the area Safeguards measures as part of the contractual
would continue for long-term. Eventually, with obligation of the developer. This created a
time the incentives were withdrawn and the traffic benchmark and had immense demonstration value
was almost 50% lower than the projected traffic. since it highlighted that infrastructure can be
Such unaccounted risk factors can jeopardize the developed in an environmentally and socially
project and lead to significant losses. responsible manner.

Bidding through competitive method yields Further Readings:


benefit: Competitive bidding for a long term 1. G. Raghuram The Case of the VadodaraHalol Toll
concession for critical infrastructure projects is Road, mimeo, Indian Institute of Management,
extremely critical. This not only brings in the best Ahmedabad, Sept. 2003, available on
private sector capabilities, but also allows the http://www.iitk.ac.in/3inetwork/html/reports/IIR-
government to get the best possible financial 2004/Chap%2011%202003.pdf
terms by ensuring competition and a level playing
field. This also, to an extent, requires capabilities 2. About Vadodara Halol Toll Road Ltd. (VHTRL),
within the government machinery to structure available on http://www.rnbgujarat.org/vhtrl.htm
projects in fashion where the private sector Prepared By: Molshree Bhatnagar
capabilities are tapped in the best possible
manner. VHTR was promoted by the GoG and
IL&FS and did not create adequate competitive
tension since there were no precedents that were
available to develop such a structure. The
appointment of the contractor was, however,
through a competitive bid process.
Need to create a balance risk return profile: The
risk return profile of the project was skewed in
favour of the private developer. For instance, the

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CIRC, 2013 www.circ.in circ@circ.in

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