NHAI's BOT Projects: How private investments have returned as the highway network sees expansion by 60%

Instead, there was a shift towards EPC (engineering, procurement, and construction) and HAM (hybrid annuity model) projects. In EPC, the National Highways Authority of India (NHAI) handles everything from acquiring land to getting project clearance, etc. In HAM, introduced to boost the waning interest of private players, the government fronts 40% of the project cost, and the awardee has to raise the rest of the amount. The government pays the remaining amount in annuity mode over the period of operation—the private players have no right to collect a toll.

But this shift has left the NHAI with significantly high debt. Its debt stands at Rs 3.48 lakh crore as of September 2023—the majority of it piled up between FY18 and FY21. In 2014, NHAI’s debt was Rs 23,800 crore. Considering the government’s continued focus on infrastructure development in recent years, getting private players to invest in the road sector again is a top priority for the Ministry of Road Transport and Highways (MoRTH), headed by Minister Nitin Gadkari.

Things are expected to change now with the government sweetening BOT agreements. A confident NHAI has announced a pipeline of 53 projects worth about Rs 2 lakh crore through the BOT mode in the next three to five years.

Among other things, the revised model concession agreement (MCA) announced by the NHAI provides significant risk mitigation compared to the earlier model. It now allows firms to borrow from non-bank lenders and has enhanced compensation if the tariff projections are built into the revised MCA.

" We are committed to reviving the BOT model and making it investment-friendly... This will not only strengthen road infra but will have a ripple effect that will help to strengthen the economy... "Nitin Gadkari Minister of Road Transport and Highways

Who’s interested?

With the revision in the MCA, the question is: will there be any takers? Construction players that have high risk appetites, coupled with strong capital availability, and a few foreign investors are ready to take the plunge, eyeing better returns from BOT. However, experts are cautious, considering the high risk associated with this mode. In this model, private developers buy the land, build the highway, and collect tolls for a specified period, usually 20 years.

IRB Infrastructure Developers Ltd, the biggest in the BOT space with a market share of 30%, is eyeing 10-15% of the awards, which works out to around Rs 20,000–30,000 crore of the Rs 2 lakh crore worth of projects announced.

Having mastered the BOT mode, the company has already completed and handed over 13 concessions, industry parlance for projects, back to the nodal agencies in three decades. As of today, the company is operating the largest BOT portfolio of 18 concessions spread over 11 states.

According to the company, the reason for its success in BOT projects lies in the minimal equity requirements for ongoing projects.

“IRB is an integrated player; it does the execution of the project and the operation and maintenance (O&M) of projects. BOT projects are funded 70% by debt and 30% by equity. We generate around 18–20% cash Ebitda (earnings before interest, taxes, depreciation, and amortisation) on construction and O&M projects,” Anil D. Yadav, Director of Investor Relations at IRB Infrastructure Developers Ltd, tells Business Today. It helps that the firm has a sovereign wealth fund as a 49% financial partner. “Hence, our equity requirement gets reduced to around 15%, which gets funded from our construction profit,” Yadav adds.

Another player, GR Infraprojects Ltd, is also looking to bid for 10-15% of BOT projects. Others likely to enter the race include PNC Infratech Ltd and Ashoka Buildcon, while Dilip Buildcon and H.G. Infra Engineering Ltd will continue to focus on EPC and HAM projects.

The NHAI has already invited bids for 13 projects under the BOT mode worth Rs 30,000 crore. More bids are expected in the second quarter of FY25 after a lull in awards during the first quarter because the Model Code of Conduct for the General Elections was in place.

“The NHAI is focussing on the award of contracts on a BOT basis and projects worth over Rs 44,000 crore with a combined length of over 900 km [are] in the pipeline for award in FY25,” NHAI sources say.

Growing interest

Even with the revision in the policy, it’s the big guns in the construction sector that are expected to shop for BOT projects. According to industry experts, BOT is not for small-time players looking for quick returns. Only sensible players who understand the risks involved with long-term projects will invest.

That is where firms like IRB Infra, GR Infraprojects, and PNC Infratech come in. Anand Rathi, CFO at GR Infraprojects Ltd, says, “The HAM model has been successful, and it may take four to five years before BOT could also be termed a success. This will certainly depend on how proactive NHAI will be in getting all the required clearances.”

“ Given the stringent fundamentals [required], we foresee limited competition. Considering the higher capital needed, competition is lowest for BOT ”Anil D. Yadav Director-Investor Relations IRB

While a majority of private players look at HAM projects as the best choice, keeping in mind the 40% capital support from the government, IRB has decided to stay away from this mode and rather focus on BOT construction. HAM remained the preferred mode of award, constituting around 55% of the total projects awarded during FY21–24.

“Over the last three decades, IRB Infra has gathered rich domain knowledge and expertise to develop BOT projects of any size for all geographical terrains,” says Yadav. He points out, “We were entrusted to operate and manage India’s first BOT project, the Bhiwandi Bypass project on the Mumbai-Agra Highway [in 1998], and it was handed back after the successful completion of the concession.” The company has an order book of Rs 35,000 crore.

The optimism stemming from the revised MCA has also spread to rating agencies. India Ratings and Research (Ind-Ra) feels the changes will help increase BOT’s share in projects to 20% in FY25 from zero in FY24. It estimates the capital expenditure requirement under this mode to range between Rs 40,000-50,000 crore in FY25, and it believes the figure could rise steadily to Rs 1 lakh crore by 2030.

CareEdge Ratings, too, expects a shift in preference from EPC towards HAM and toll projects in the medium term. It feels the share of EPC projects could reduce to around 25–30% going forward.

This shift couldn’t be more timely. As mentioned earlier, NHAI is grappling with a lot of debt. So much so that it has been stopped from borrowing from the market. It is now looking to lighten the burden by monetising assets and getting private investments.

One of the significant features of the revised MCA is the new termination payment regime, whereby 90% of the debt is fully covered by the NHAI in case the concessionaire defaults. The introduction of a buyback provision if additional tollways and competing roads are built reduces traffic risk for the developer.

Rathi of GR Infraprojects says the tenure of the concession agreement can also now be extended by 30% if a competing road is built.

Limited competition

Despite the changes, BOT is unlikely to see very high competition. Unlike HAM projects with over 20 bidders, industry players expect five to six domestic and two to three international players to bid under BOT.

“Given the stringent fundamentals [required], we foresee limited competition in this field. Considering the higher capital requirement, competition is lowest for BOT projects,” says IRB’s Yadav. GR Infra also sees moderate competition. “I believe competition to be moderate as more upfront contribution (construction as well as equity support) is put by the authority,” adds Rathi.

Companies like PNC Infratech say they are exploring BOT opportunities but are aware of the revenue risk. HG Infra, a player in the EPC segment, says it is not interested.

“Our order of preference would be in the sequence of EPC, followed by HAM, and then our last preference would be BOT-Toll,” T.R. Rao, Director of Infra at PNC Infratech, said in a recent investor call.

Rating agency CRISIL sees some signs of a shift of large developers from HAM to BOT, as margins have fallen in the former due to increased competition in light of relaxed bidder eligibility criteria. One reason for the BOT debacle in the past was aggressive bidding by small players who could not hold on to this capex-intensive mode that has a long gestation period.

“ ...it may take four to five years before BOT could also be termed successful. This will certainly depend on how proactive NHAI will be in getting all the required clearances ”Anand Rathi CFO GR Infraprojects Ltd

The rating agency flags two issues—bidding discipline and lenders’ willingness—as looming risks for BOT 2.0. It says aggressive bidding could impact the take-off of projects, and all eyes will be on lenders’ willingness to re-enter BOTs.

“Average bid premiums (for HAM) tumbled from a peak of 15-20% to around 4-6% in the last few fiscals. As a result, the share of the larger developers has dropped substantially since many of them have refrained from bidding aggressively to protect margins,” Aniket Dani, Director of CRISIL Market Intelligence and Analytics, tells BT.

With the amendment in the MCA and given the scope of higher profitability due to lower bidding competitiveness in the BOT space, many large developers are keen on taking up such projects, he adds. But they may find it challenging based on their current balance sheet capacity to finance BOT projects with higher funding requirements.

“Furthermore, the gestation period for BOT projects is longer, which results in higher risk on the part of the players since capital is tied up for a longer period. This also limits the number of players bidding for this model,” explains Dani.

While HAM and BOT projects will co-exist in the near term, BOT aims to reduce NHAI’s debt burden, besides opening up a new avenue for financially stronger players. There is also growing interest among foreign investors. “While the interest among developers to bid for BOT projects post the revamping of concession is yet to be seen, participation from foreign funds by tying up with Tier I EPC developers for executing the road construction is envisaged. Multiple investors are in discussion with EPC players to bid for BOT projects,” Rishabh Jain, Associate Director at Ind-Ra, tells BT. Bidder participation, though, is expected to increase only after the initial few bids.

Per Ind-Ra, the equity contribution could increase to 20–25% under BOT from 10-15% under the HAM mode, but that will be offset by higher margins and lower competition.

Will History Repeat?

Between 2008 and 2012, companies like HCC and Gammon got lured into BOT from EPC due to the promise of quick returns as high as 100% compared to 10% in EPC. But they soon fell into a debt trap owing to construction delays caused by the non-availability of land and necessary clearances, adding cost and time overruns, aggressive bidding, lower-than-estimated revenue, and weak balance sheet capacity.

Ind-Ra asserts that developers need to be mindful of aggressive bidding, taking projects beyond the appetite of their balance sheet, and overestimating toll revenue for greenfield projects. They must protect themselves from volatility.

PNC’s Rao says the government cannot go for a larger number of BOT contracts until the mode becomes viable for construction companies. So, there has to still be a sizeable HAM mode also on offer.

Besides, the impact of the evolving infrastructure landscape—with competing roads and alternative modes of transportation (like dedicated freight corridors for freight and inland waterways)—on the BOT model remains to be seen. According to CareEdge, the introduction of the revised MCA under the BOT-Toll model is a welcome move; however, the extent of bidding aggression and on-ground enforcement of contractual clauses will remain key monitorables. Rathi says the major risk would be the non-availability of land, which would deprive the concessionaire of tolling rights for the entire stretch, which is not the case in HAM/EPC.

The increased focus on BOTs also comes as HAM projects are facing some headwinds. That’s because banks have tightened capital requirements as smaller developers transitioned from EPC to HAM after technical and financial norms were relaxed. They’re struggling now to secure financial closure after bidding aggressively.

It’s visible in the increase in the number of projects that are awaiting the appointed date—or the date when the project finally starts—to 110. Of these, 55 projects were awarded in 2021 and 2022. That’s a delay of 18–30 months in starting the construction, says an Ind-Ra report. “Projects with financially strong and medium sponsors have mainly been impacted by delays in land acquisition,” it notes.

For these and the other reasons laid out earlier, the government and NHAI will hope that the sweetened BOT model will bring the private players back. 

@richajourno