NHAI seeks to revive BOT projects, may give minimum toll guarantee

Developers are exposed to market risks in BOT projects since their return on investment is linked with the traffic flow on the stretch.

NHAI seeks to revive BOT projects, may give minimum toll guarantee
Last fiscal, only 1% of the 6,306 km project was awarded through the BOT mode.

The National Highways Authority of India (NHAI) is planning to award 500 km or around 8% of the 6,500 km target for the current fiscal through the build-operate-transfer (BOT) mode. It may give minimum toll revenue guarantee to make it easier for contractors to bid for BOT projects.

In last five years, BOT share in NHAI’s award mix had never been more than 3%. In two years – 2018-19 and 2019-20 – not a single project was awarded through the BOT mode, according to Crisil. Last fiscal, only 1% of the 6,306 km project was awarded through the BOT mode.

“This fiscal, we plan to award around 500 km through the BOT route. However, it will all depend upon the market response. The first tender is likely to be issued in a month or two,” NHAI’s member projects RK Pandey told FE.

The emphasis on BOT is aimed at reducing the authority’s burden on financing highway projects, currently being built more on hybrid annuity model (HAM) and engineering procurement & construction (EPC) routes in which government pays 40% and 100% of the project cost respectively to the concessionaire. NHAI had around Rs 3.5 trillion debt at the end of FY22.

For BOT projects, the government does not pay for the construction cost, the developer recoups investment by collecting toll on the stretch for the entire concession period, typically 20-30 years. For an attractive stretch, developers often offer premium to the authority as well.

The government has been trying to rekindle investors’ interest towards pure-play public-private-partnership (PPP) projects for long through a host of changes in the model concession agreement (MCA). These included permitting the change of ownership from existing two years to one year after commercial operation date, aimed at freeing developers’ fund to take up new projects.

However, most developers haven’t shown much interest since they will require to bring higher equity, amounting to 25-30% of the project cost for BOT projects, when compared to 10% or even less for HAM projects. EPC does not require equity participation on the part of the developer. Many developers’ balance sheet also does not support huge equity investment in BOT projects, leaving the space for just a few to compete with.

Developers are exposed to market risks in BOT projects since their return on investment is linked with the traffic flow on the stretch. India’s transportation sector is seeing a considerable change with alternate modes like dedicated freight corridors and inland waterways may cause conversion of traffic or minimise the flow.

“For BOT (Toll) projects, the equity requirements are much higher when compared to HAM and at the same time, developers are exposed to market risk. Risk averseness of road developers has increased over the last few years. Even today, many developers’ balance sheets cannot support huge equity investments towards BOT projects. There are only a handful of developers who have access to capital to deploy in such assets. Therefore, the BOT (Toll) model is witnessing limited participation and is expected to account for less than 5% of awards in FY23,” said ICRA’s Rajeshwar Burla.

Of course, there are some private players who have shown interest in BOT projects. Following a management discussion, brokerage firm Motilal Oswal in a July 14 report said, “IRB Infra will continue to focus on BOT toll projects as it sees a stronger strike rate there, given the lesser participants.”

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