Big vs small in BOT project offering; traffic volume may be key determinant

Experts feel that kick-starting the process with relatively smaller stretches will help to test waters

The financial strength of companies and lower project risk could be crucial determinants in the success of the new build-operate-transfer (BOT) model, which the government is banking on to bring in private money to build national highways.

The National Highways Authority of India (NHAI) is likely to offer by month-end a 70-km stretch in Karnataka, costing around Rs 1,700 crore, on a BOT basis.

The stretch appears to be small but companies say it is traffic and toll revenue and not the contract’s ticket size that would make a project viable.

“Size is not a big determinant. It is the anticipated traffic on that stretch and the expected revenue from the project are important factors,” Devendra Jain, chief executive officer, Dilip Buildcon, told Business Standard.

The company has executed seven BOT projects — six annuity and one toll —in the past and is open to evaluating the ones that would be offered.

Experts say kick-starting the process with relatively small stretches will help in testing the waters.

“The Ministry of Road Transport and Highways recently revamped the BOT concession agreement. Considering that there has been a pause in awarding such contracts, it’s best to start with a small stretch and test the investor appetite,” said Jagannarayan Padmanabhan, director (transport), CRISIL Infrastructure Advisory.

Success would depend on how accommodative the authority is towards the private sector, he said.

Smaller projects could help in a faster turnaround or attaining a completion cycle, which could provide opportunities for a bigger pool of companies.

“The smaller contract will save six-eight months’ construction time. It also means more companies can participate in tendering, which allows for more competition and a better price discovery for the contract,” Union Road Secretary Giridhar Aramane told Business Standard.

The government, however, has not closed the option of offering bigger BOT projects. “We may execute such projects but now we want to start small and then graduate to big contracts,” Aramane added.

The new offer by the NHAI is the first such project in over two years. The previous BOT one – the Hapur-Moradabad highway – was awarded in March 2018 to IRB Infra for approximately Rs 3,400 crore.

In February this year, the NHAI came out with the new BOT guidelines to encourage private participation.

In its recent report on infrastructure, HDFC Securities said Dilip Buildcon started FY21 with a bang with order flows of more than Rs 10,000 crore and surpassing those of FY20.

For PNC Infratech, the report said while its turnover was Rs 4,500 crore, it needed to go beyond roads and use its track record in railways to get new wins.

Sadbhav Engineering has sold the assets of Sadbhav Infrastructure Project. It needs private equity, the report said.

The thought behind changing the guidelines was the exit of large companies. These companies had the appetite for such projects but shied away from them due to delayed returns on investment, rigid concession agreements, and legal disputes with the government.

The new model concession agreement states if there is a default, the NHAI and the concessionaire can ask the lender or banks to invite, negotiate, and procure other offers to take over the contract. If the NHAI has an objection, it can, within 15 days of the lender’s proposal, give an order after hearing the representative. If it has no objection, it will be taken as accepted.