Technology penetration for tolling has further helped, with foreign investors showing interest in co-investing in such projects.
IRB Infrastructure was India’s first private concessionaire for a highway project under the build-operate-transfer (toll) model. While BOT projects went out of fashion for a long period, a resurgence of investor interest is visible lately. And IRB has again emerged as the preferred bidder for one of the two BOT projects on offer. Speaking to Surya Sarathi Ray, chairman and managing director Virendra D Mhaiskar explains why investing in long-term infrastructure assets is central to the IRB’s business strategy. Excerpts:
Tell us why you do you find BOT (toll) projects attractive, even as the engineering, procurement & construction (EPC) and hybrid annuity model (HAM) projects are relatively less risky for private developers?
The reason behind our preference for BOT projects is our asset-owner ideology. We have more faith in investing capital and owning assets for a long period of time, rather than just constructing a project and handing it over. Under the BOT model, we are tied to the project for 20-plus years – covering construction, O&M, tolling, commuters’ experience and taking responsibility for all of these.
Our experience of over two decades of operating assets across India gives us in-depth understanding and insights into traffic variations.
Technology penetration for tolling has further helped, with foreign investors showing interest in co-investing in such projects. Also, with the floor-and-cap model of variable concession periods linked to traffic, it protects the interest of both – concessionaire and the National Highways Authority of India (NHAI). This also provides us visibility for 20 plus years of steady cash flows, and asset value. While the EPC and HAM space is crowded with 15-20 players, BOT has a smaller count of 5-7 sturdier players who understand traffic risks and can perform on the basis of their balance sheet strength.
In the Dankuni-Palsit project, you have asked for a 4.5% viability grant while NHAI was actually expecting a premium. Why do you think the project doesn’t deserve a premium?
Dhankuni-Palsit is a part of the Golden Quadrilateral and the old Grand Trunk Road connecting the city of Kolkata with industrial belts of Bardhman and further Asansol-Durgapur. It offers a compelling proposition to be taken up on the BOT model. Contrary to the detailed project report (DPR) which talked about 30 and 27 years of concession periods for the two projects, NHAI had reduced the periods to 20 and 17 years, respectively.
Even after that, we believe NHAI may have expected a nominal premium, on the basis of its evaluation with 5% traffic growth and 5% Inflation assumption. The DPR was prepared one and half years ago. However, the situation has changed due to Covid-19 impact. Cost ascertained 1.5 years ago stands escalated over this period, especially with diesel prices increasing from Rs 66/litre to Rs 79/litre. Meeting NHAI assumptions of 5% each for inflation and traffic growth seem unlikely in the near term due to Covid impact, substantially suppressing base collections.
Reduced labour availability due to the pandemic and corresponding change in operating costs stretched the equation further. All these changes to NHAI assumptions dented the viability of the project and hence, bidding premium for the project becomes impossible, rendering grant support the only viable option. The bid placed by us requesting for 4.5% grant is well within the approved limit of up to 10% of the total project cost (TPC) set by NHAI, as mentioned in the bid document.
Will you bid for more BOT projects, if offered, in the coming weeks?
Absolutely. We have a strong balance sheet and access to funds post the transaction with GIC affiliates and we will continue to bid for more BOT projects as and when available.
The government is in the process of revising the model concession agreement for BOT projects. What are the changes you think should be brought in to attract more private developers in the BOT space?
Private developers and/or investors in BOT space seek a firm, clear and bankable concession contract to ensure elimination of all ambiguities and safeguarding of their investments. Infrastructure sector relies on project funding sourced from banks and financial institutions.
There are two key areas that need to be reformed in this regard: a) Termination payments should be linked to NPV of unexpired cash flows from underlying projects, similar to toll-operate-transfer (TOT) projects, as this will make the concession lender friendly and b) Diversion caused due to the expanding grid and thus competing roads renders the project unviable. Investors/private developers need a mechanism to safeguard their investment in such scenarios – either through compensation based on same termination approach as above or some other way of making good their losses. All such claims should be settled in a defined timeframe.
What are your future plans for the highway sector?
Operating for over two decades in the roads and highways segment, IRB Group has built the largest asset base of over Rs 45,000 crore. We now aspire to take this number to over Rs 1 lakh crore in the next five years. This would involve a combination of organic and inorganic growth. Having bagged, funded and operationalised the largest TOT in India in stipulated time, we are open to more such growth opportunities. While we continue to remain focused on BOT model and expect meaningful order inflows in the segment, we will opportunistically evaluate and participate in HAM projects as well.
How would the Indian highways’ landscape look if Chinese investments are thwarted?
There aren’t meaningful Chinese investments in Indian roads and highways segment so nothing changes with the ban implemented.