Infra firms wary of BOT projects

The National Highways Authority of India (NHAI) last week sought the Election Commission’s permission to go ahead with the bidding of 50 projects that had been initiated before the election dates were announced.

But companies and observers alike believe the response to these projects will be no different than in the recent past despite the improvement in the liquidity situation unless the NHAI addresses a host of issues.

Infrastructure developers say unless there is better clarity on land acquisition norms, revision of project cost estimates and higher viability gap funding, they will stay off most build-operate-transfer (BOT) projects.

Jalandhar Reddy, executive director of the Hyderabad-based KNR Constructions, said that there are a lot of instances where land acquisition has become a huge obstacle. Before the start of any BOT road project, the NHAI has to ensure that at least 50% of the land needed for the project is acquired. “It proposes to acquire the rest of the land in 6 months to one year of the start of the project.
But it’s not happening in many projects,” said Reddy.

Infrastructure firms’ greatest worry in the past few months has been the tight liquidity situation and high interest rates, both of which are easing. Interest rates are now at 11-12%, down from the 13-14% levels seen 2-3 months ago. The cost of raw materials like steel and bulk cement has also fallen, especially after the reduction of excise duty from 10% to 8% on February 24.

Moreover, the government has authorised the India Infrastructure Finance Company (IIFCL) to raise Rs 40,000 crore through tax-free bonds. IIFCL, which has already raised Rs 7,370 crore, is expected to lend Rs 10,000 crore to banks, which in turn can lend for infrastructure projects. Praveen Sood, chief financial officer, Hindustan Construction Company, said though rates have come off their peaks, they need to go further south. “A lot of projects were priced factoring in an interest rate of 8-9%, which means costs have to be reworked,” he said.

Since September last year, out of the 50 projects announced by the NHAI, only 22 have found bidders and many awarded projects have been struggling to achieve financial closure. H S Bharana, chairman & managing director of infrastructure & realty player Era Group, said, “Unless the cost estimates are improved, it’s very difficult to say what the response to the new NHAI contracts would be.”

The NHAI has reworked the cost of a few projects, but firms want it done for more projects. An upward revision in project costs is essential in the current scenario as it would mean a higher viability gap funding (VGF), which is a share of the project cost given periodically by the NHAI to developers. Currently, the VGF stands at 40%.

There has been talk of the NHAI increasing it to 50% to make BOT projects more viable. While some like Brijesh Koshal, head of investment banking at Daiwa Securities SMBC, believe it makes more sense for the NHAI to do the project on its own than offer a VGF of 50%, others feel such a move could give BOT projects a much-needed boost.

Reddy said, “The NHAI should try to promote BOT-toll projects with a higher VGF, but if that does not work, it should award projects on an annuity basis.”