Road projects bagged at a premium fetch less returns

Road developers who paid premium to bag highway projects are seeing lower returns, with their bullish projections not matching the actual toll collections and higher bids causing cost overruns.

A study by ratings agency Crisil has found out that build-operate-transfer (BOT) projects awarded by the National Highways Authority of India after 2009 are fetching lower 14% equity returns as against 22% earned by projects bagged before 2009 through relatively modest bids.

While the government provides assistance for road projects in the form of viability gap funding (VGF), most of the projects after 2009 were bagged by developers by paying a premium as they were bullish on the toll prospects.

About 65% projects after 2009 were awarded on premium basis as compared to 25% in 2008-09, with premiums, in some cases, even exceeding project costs.

For the report released on Monday, Crisil studied 23 projects that form 25% the length of BOT toll road operations in the country. It found out that in projects where few developers had bid, had modest contract amounts while higher-than expected traffic growth boosted toll revenues.

Also, with the toll collection linked to WPI index, rising inflation since fiscal 2010, too, boosted toll revenues. Crisil said with aggressive bidding driving up costs, the newer projects will still earn lower returns.  

An earlier report by Fitch Ratings had found that traffic was not up to expectations for many projects, barely managing 45% of the estimates in the first year. It said that toll performance matching developers’ expectations was rare.

It said overestimation of traffic and optimistic view on toll collection was due to a number of reasons including parent or sponsor companies’ intent to grab the lucrative construction contracts arising from the project and a lack of reliable traffic history on the stretch and limitations in traffic study methodology.

Fitch said most of bidders were originally EPC contractors, who chose to go with the most optimistic projections.

Pankaj Kumar, senior analyst, KJMC Capital Market Services, said most of the projects awarded before 2009 were generating an internal rate of return of 18-20%, but those awarded after this were getting only 15-16% in the best case scenario while a few even getting negative net present value. He said the top two companies in BOT space — ITNL and IRB — expanded their road portfolio significantly before 2009. Currently, IRB has 16 projects, of which 10 were bagged before 2009, and baring a few like Surat-Dahisar and Surat-Bharuch, most are minting money.

Fitch said at least 15% of the projects rated by them are facing problems in their debt servicing commitments in a timely manner while 10% of Crisil-rated projects are facing this problem.

Satish Parekh, managing director, Ashoka Buildcon, said,“Though, most of the projects are bagged by good companies with a proven track record, a few projects are suffering due to poor due diligence and relying too much on overoptimistic traffic consultants.”