Highway projects: Investors seek modifications in BOT model

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Published: November 5, 2019 11:30:25 AM

The share of BOT (toll) project awards has come down to naught in the last two years from its peak of 96% in 2012.

highway project, highway industryIn BOT toll concessions, there is no provision for the payment in case of escalation in basic cost for the raw materials like cement, steel, bitumen and fuel.

Highway developers have sought changes in the build-operate-transfer (BOT) contract format to make it ‘more realistic and friendly’ towards the concessionaires and enabling tying up of funds from the lenders.

The share of BOT (toll) project awards has come down to naught in the last two years from its peak of 96% in 2012.

“I don’t have a problem in taking BOT projects but I want the National Highways Authority of India (NHAI) to be more realistic in determining the total project cost (TPC). Historically, differences in NHAI TPC vis-a-vis developers’ cost lead to apathy by lenders in funding BOT projects,” IRB Infrastructure Developers MD Virendra D Mhaiskar said.

Considering the long-term nature of the concession period and taking into account the need to continue developing new road network, he said there was a need to have a robust compensation policy towards possible loss of revenue due to diversion of traffic on such competing facility. The definition of the ‘competing road’ should be practical enough to accommodate the nuances of newer development in the vicinity of the project road leading to diversion of traffic, he added.

National Highways Builders’ Federation (NHBF) wants developers to be adequately compensated as the recent revision in the law with regard to axle load parameters permitting vehicles to carry increased load has caused a reduction in traffic volume and thus, loss in the revenue for the developers.

In BOT toll concessions, there is no provision for the payment in case of escalation in basic cost for the raw materials like cement, steel, bitumen and fuel. The escalation should be compensated to the concessionaire for these items and may be fixed at the bidding stage itself, it said.

Rekindling developers’ interest to take up projects under BOT is a must for the government as its stressed financials are not equipped to take up projects through fully-paid engineering, procurement and construction (EPC) model or through the little-soothing hybrid annuity model (HAM), where 60% of development cost is paid over a period of 15 years to the concessionaire has also come crashing after a hectic three-four years. Not a single highway project has been awarded under HAM this fiscal, sharply down from its 40% share in awards in FY19.

Under BOT, the government does not pay anything to the developer, who returns the stretch to the government after building the road and collecting the toll on it for 20-30 years as per the agreement. The onus of maintaining the road during the concession period rests with the concessionaire as well.

The BOT model, however, is attractive to developers with relatively high risk appetite and strong financial health. While higher returns is what drew developers to this model in the past, delays in construction and lower than estimated revenues have had an adverse impact on the industry.

Crisil Infrastructure Advisory director Akshay Purkayastha said: “To revive the BOT model, it is important to address some fundamental issues. First, projects should only be awarded if minimum 90% land has been acquired and all necessary clearances (in particular environment and forests) have been procured. Second, there has to be a mechanism to reconcile NHAI’s TPC and the lenders’ TPC to provide comfort, particularly in the event of termination. Third, the present definition of ‘competing roads’ has to be widened to protect the concessionaire for revenue loss.”

The revival of interest in BOT projects will hinge on three key factors: balanced distribution of risk in public-private-partnership (PPP), availability of financing, and attractiveness of projects being offered. In addition, the mechanism of claims settlement can also be further strengthened and fast-tracked, Icra assistant vice-president Abhishek Gupta said.

The government has also started working on making BOT model friendlier to the concessionaires. “We have noticed that a majority of disputes and delays arising in BOT (toll) projects are due to delays in land acquisition and statutory clearances such as forests and environment by NHAI. So, in the MCA, we have proposed that NHAI shouldn’t give the appointed date without fulfilling all the responsibilities. There should also be no option for waiver of conditions precedent by either party,” a source said.

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