Economic Evaluation of Godhra M.P. Border Project

CHAPTER-1 INTRODUCTION

1. GENERAL:
Road Traffic has been growing with very rapid rate i.e. 8 % per annum, hence the traffic intensity and volume on the road is high. The present road network is necessary to improve to accommodate the future traffic and to provide the good riding quality. The development of Infrastructure has been done by the public sector through the fund collected from taxes, but huge fund are required for modernization of road network.

Due to decreasing financial resources, government is not in position to invest the funds in those developments. This has brought to focus the need of attracting private investment in road in India. The funds provided by private sector for improvement of road condition are recovered from road user by toll tax. After recovery period that particular road section is transferred to government. This new Idea is called as BOT system.

1.1 ABOUT B.O.T. PROJECT:
B.O.T. (Build/Own/Transfer) projects are public infrastructure projects, which employ a particular form of structured financing. The involvement of the private sector in the development of infrastructure by way of BOT projects, alternatively called B.O.T. (Build- operate-transfer) is proving to be a challenging exercise.

BOT projects have several advantages such as-

1. The government gets the benefit of the private sector to mobilize finances and to use the best management skills in the construction, operation and maintenance of the project.

2. The private participation also ensures efficiency and quality by using the best equipment.

3. The projects are conducted in a fully competitive bidding situation and are thus completed at the lowest possible cost.

1.2 STRUCTURE OF BOT PROJECTS
In a B.O.T. arrangement, the private sector designs and builds the infrastructure, finances its construction and owns, operates and maintains it over a period, often as long as 20 or 30 years. This period is sometimes referred to as the “concession” period. Traditionally, such projects provide for the infrastructure to be transferred to the government at the end of the concession period.

1.3 PARTIES TO BOT PROJECTS
There are a number of major parties to any BOT project, all of whom have particular reasons to be involved in the project. The contractual arrangements between those parties, and the allocation of risks, can be complex. The major parties to a BOT project will usually include:
• Government Agency
• Sponsor
• Construction Contractor
• Operation and Maintenance Contractor
• Financiers
• Other Parties

1.4 THE AGREEMENTS
The critical element of the off take agreement from the government agency’s perspective is the performance warranties to be given by the sponsor. The performance warranties should deal with both the quantity and quality of output from the project together with the timing within which that output is required by the government agency. The government agency will also require the off take agreement to detail the consequences of a failure to meet the performance standards, such as liquidated damages and/or the right to call an event of default.

1.5 CONSTRUCTION CONTRACT
The Construction Agreement is, typically, a turnkey design and construct fixed price contract, intended to reflect the back to back arrangements necessary to match up with the interdependent off take agreement, operation and maintenance agreement, and other agreements comprising the BOT project. There are a number of construction contract considerations peculiar to BOT projects:

1.6 LIMITATION OF LIABILITY
The need to limit a Contractor’s liability is not special to BOT structure projects. The amounts involved, however, are so large as to deserve special attention. A Contractor under a traditional Construction Contract will typically need to limit its exposure. The Construction Contractor in a BOT project is potentially exposed to damages for beyond the value of the Construction Contract.

In particular, the Construction Contractor has potential liabilities for:
(i) damages to the sponsor for underperformance of the project;
(ii) damages to the sponsor for lateness in delivering the project;
(iii) damages to the sponsor in rectifying defects;
(iv) damages to the sponsor for consequential losses incurred by the sponsor under the offtake agreement, or under the Operation and Maintenance Agreement, or under the Finance Agreements.,

1.7 TERMINATION
In a BOT structure project, the Government and the Financiers must have the ability, in the event that the sponsor is in default to the point where the take-or-pay Agreement and/or the Finance Agreements are terminated, to take over the obligations of the sponsor under the Construction Contract and the Operation and Maintenance Contract. The agreements with the Construction Contractor and the Operation and Maintenance Contractor, therefore, must include provisions obliging the Construction Contractor and the Operation and Maintenance Contractor to comply with that regime. In fact, that outcome (the stepping-in) would usually be in the interest of both the Construction Contractor and the Operation and Maintenance Contractor. The rights to assume the sponsor’s position under those agreements would always be dependent on curing any contractual defects (for example, non-payment) existing under those agreements. (Otherwise, contractually, the Contractors could terminate their respective contracts, irrespective of the identity of the sponsor for the time being.) For this reason, the Construction Contractor and the Operation and Maintenance Contractor should have no concerns in relation to these provisions. As a matter of practice, however, they do have peripheral concerns. Accordingly, they would prefer to have approval rights over the step-in process. This is not possible. It is a critical feature of BOT projects that the right to terminate or step in, in appropriate circumstances, exists at all times for the Financiers and the Government. It is strategically impossible for the Construction Contractor and/or the Operation and Maintenance Contractor to have a right of approval over such step-in or termination.

1.8 OPERATING & MAINTENANCE AGREEMENT
The Operation and Maintenance Agreement is a long term contract. Many of the contractual considerations which are set out below need to be considered in context of the matters set out above.

Terms of Operating and Maintenance Agreements

Typically, the following types of terms may be expected in this type of Agreement:
• Pre-Operational Phase
• Operation of the Facility
• Sponsor Obligations
• Performance Obligations

1.9 FINANCE FACILITY
Financiers are concerned about the level and allocation of risk, as they are lending large amounts of money prior to the project being completed. A financier will examine are the dates for completion of the infrastructure must be in accordance with those in the construction contract and be readily achievable.

1.10 FORCE MAJEURE
All the core contracts of an infrastructure project will have a force majeure provision, and in a perfect world these provisions would match and be consistent. Typically, a force majeure clause will provide that in the event of a party being unable to perform its obligations due to the occurrence of a force majeure event, then that party’ obligations shall be suspended for the duration of the force majeure event. The clause may go on to provide that for extended force majeure parties may have rights of termination.

What should be a Force Majeure Event?
Force majeure events typically include those events which are outside the control of the parties; examples are war, earthquake, flood, fire, storm, tempest and the like. What will or will not constitute a force majeure event will need to be tailored to meet the needs of the specific project.

1.11. WHY BOT PROJECTS ARE COSTLIER
Until recently, the responsibility of creating proper infrastructure services had been entrusted almost exclusively to the public sector, which has faced many problems like inefficiency, lack of accountability, poor management, over employment etc. In order to overcome these problems, it becomes necessary to induce private sector participation in the infrastructure sector. Nowadays more and more infrastructure projects are being executed by entrusting the same to the private entities, world over. Such projects have mostly been in the road sector but quite a few projects have also been undertaken for bridges, ports and even railways. The privatized projects are structured into various financial forms and are accordingly known as BOT (Build, Own, Transfer), BOLT (Build, Own, Lease, Transfer), BOO (Build, Own, Operate) etc. However, the basic issues remain similar for all the devised schemes. Generally the phrase ‘BOT projects’ have now come to be treated as synonymous to all the ‘Privatized projects’.

I moturi Govindrao B.E. Civil has done the project on Economic evaluation of Godhra M.P. Border Project under the guidance of Er. Raj M Khan M.E. Civil

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