Private risk capital, absent from the highway sector since 2014, is making a comeback. The government's recent amendments to the model concession agreement (MCA) have successfully heightened investor confidence.
The revised MCA offers liberal construction support, allows borrowing from non-bank lenders, and promises enhanced compensation if tariff projections are not met. It also includes buyback provisions by the National Highways Authority of India (NHAI) under certain conditions and increases government liability if contracts are terminated.
Other factors, such as improved developer finances, the emergence of Infrastructure Investment Trusts (InVITs), new monetization models like Toll Operate Transfer, and a growing global appetite for revenue-generating assets, have further encouraged developers to invest.
"BOT is back in favour and has seen renewed interest from private players," said a spokesperson for IRB Infrastructure Developers Ltd. In the latest BOT project awarded by NHAI, seven to eight players submitted financial bids, compared to three to four in previous years.
The industry is, however, waiting for more lucrative projects. "Contractors are eager to undertake worthwhile work. After the changes in the MCA, they await new projects," said P.C. Grover, Director General of the National Highways Builder Federation.
Historically, BOT awards constituted 5-7% of total project awards in recent years. This percentage is expected to increase significantly. Vinay Kumar, group vice-president and sector head at IRCA, noted that BOT projects currently open for bidding offer good toll revenue. Bids are open for 517.4 km of roads with a total cost of around Rs 309.75 billion.
NHAI has prepared a pipeline of 53 projects spanning 5,214 km, requiring an investment of Rs 2.1 trillion to be developed through BOT. Analysts predict these projects could be successfully bid out within the next two financial years.
However, the Bharatmala Project remains in limbo, with no new projects announced since December last year. It will be replaced by Vision 2047, aiming to develop 50,000 km of greenfield access-controlled expressways.
From 2007 to 2014, only BOT was used for building highways. Disputes and delays led to a significant slowdown in highway construction. Between 2018 and 2020, no road concessions were awarded on the BOT model. The government's spending increased from Rs 4077.89 billion in 2015-16 to Rs 2.64 trillion last year as private investment dwindled. The interim budget allocated Rs 2.76 trillion for the sector, and NHAI's debt has soared to Rs 3.35 trillion by the end of FY24.
Reviving BOT will alleviate the budget burden as the government aims to add 100,000 km of highways by 2030, requiring Rs 50 trillion. Of this, Rs 25-30 trillion can come from the budget, while Rs 20 trillion must come from the private sector. "This presents a significant opportunity of Rs 15 trillion on a PPP basis for players like IRB," the company spokesperson said.
To keep private sector participation alive, the government introduced the Hybrid Annuity Model (HAM), where 40% of the project cost is covered by the government, and 60% by the developer. In return, the developer receives annual installments, and toll collection benefits NHAI. Developers now prefer BOT for the potential upside, even if it involves higher equity commitments.
Anand Kulkarni, Director, Crisil Ratings, highlighted the attractiveness of toll projects due to their linkages with economic growth and inflation hedging. The maturing of InVITs has further opened opportunities for contractors to monetize their assets.
"Availability of asset monetization options through vehicles like InVITs also supports developer interest," Kulkarni said. InVITs have proliferated since 2019, with over 20 now in existence. Last year, the road sector received half of the Rs 1.3 trillion that flowed into InVITs, a figure expected to rise to 75% this year. The government also allows highway ownership changes after one year of commercial operations, offering another exit option for road developers using BOT. (Source:FE)
