Nearly 23 of the 35 contracts announced by the National Highways Authority of India (NHAI) in the last three months haven’t found any takers.
Nearly 23 of the 35 contracts announced by the National Highways Authority of India (NHAI) in the last three months haven’t found any takers. But that is no indication of developers’ strong interest in build-operate-transfer (BOT) projects on a toll basis. So much so that they prefer them over annuity contracts that are generally considered less risky.
A developer bids for a BOT-toll road contract and after winning it, raises funds, operates it for a specified period, earns revenues through toll and transfers it back to the government. A BOT-annuity road contract, on the other hand, is one where the government pays the developer annuity every six months over the concession period.
Some consider annuity projects a better bet than toll contracts in the current environment because the developer is assured payment by the government on a regular basis and is not exposed to risks related to density of traffic unlike in a toll contract. However, Praveen Sood, chief financial officer, Hindustan Construction Company (HCC), believes that this is the best time to bid for toll projects. “Material prices are coming down and so are interest rates, making toll contracts viable,” he said.
Prices of steel, bitumen and cement have fallen by up to 30% over the last three months and interest rates have dropped nearly 2-3 percentage points to 11-12% in the last couple of months. HCC won its first Rs 550-crore BOT-toll national highway contract in Badarpur near Delhi last September. Virendra D Mhaiskar, chairman and managing director (CMD) of IRB Infrastructure Developers, too, didn’t find toll contracts riskier than annuity ones. “Annuity is nothing but deferred payment. There could be arm-twisting by the client and the annuity could be delayed citing slow progress of work,” he said.
IRB is the country’s largest toll operator and has 14 toll contracts covering a total of 800 km. Mhaiskar added that the government is also really keen on handing out contracts through the toll model. Observers attribute the poor response to NHAI contracts to the vague concession agreements and the outdated cost of projects.
E Sudhir Reddy, CMD of Hyderabad-based IVRCL Infrastructure & Projects, said annuity contracts are rare these days since the government is willing to push through toll contracts with viability gap funding (VGF), which means a proportion of the project cost is provided by the government to make a commercially unviable project feasible.
Reddy said that the density of traffic seems to have gone up by nearly 30% in the last 3-4 years, working to a toll operator’s advantage. IVRCL currently has three toll projects.
The enthusiasm for toll projects, however, is laced with caution. Jalandhar Reddy, executive director of KNR Constructions, said many projects being offered by the NHAI now don’t have a very high density of traffic. So companies need to do due diligence before bidding for them. “Though developers like annuity contracts, toll projects with a high traffic density are now doing well,” he added. KNR currently has two BOT road projects, both on the annuity model, but Reddy said they’re submitting prequalification bids for over 40 toll contracts.
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