New BoT Terms For Highway Construction Raise Concerns Among Private Investors
The recent revisions to the concession terms for build-operate-transfer (BoT) highway projects by the government have sparked concerns among private investors, potentially pushing them into risk-aversion mode.
According to reports, under the modified terms, the government now offers to contribute up to 50 per cent of the equity finance and 40 per cent of the entire project cost for BoT projects.
This could significantly reduce the financial burden on private investors, with their share potentially dropping to as low as 15 per cent of the project cost, given the typical 7:3 debt-equity ratio for such projects. Additionally, non-banking finance companies can now lead lending to BoT projects, and private developers will have a say in negotiations for any debt refinancing needed during the cost recovery period.
Moreover, the revised model concession agreement (MCA) promises investors compensation for revenue shortfalls resulting from traffic undershooting projections, further enhancing investor protection. However, these extensive provisions beg the question of whether such BoT concessions can still be considered "pure-play" public-private partnerships.
These changes come as the National Highways Authority of India (NHAI) is already implementing over half of its projects under the hybrid annuity model (HAM), which involves the government contributing 40 per cent of the capital costs upfront and paying the remaining 60 per cent as annuities over the project's life. This shift towards heavily government-supported models has raised concerns about the ultimate liability falling on taxpayers.
Despite efforts to attract private investment, response to recent BoT projects has been lukewarm, with only 1.5 per cent of projects awarded under Phase 1 of Bharatmala falling under this model.
The government's decision to overhaul the BoT model reflects its recognition of the challenges in attracting risk capital to the infrastructure sector. However, there are concerns that these policy changes may inadvertently dampen investor risk appetite.
While private investments are flourishing in sectors like telecom, seaport services, airports, and renewable energy, challenges persist in sectors like highways and railways due to the absence of market-determined pricing and feasibility concerns. To address these issues, experts suggest earmarking remunerative areas and short-gestation projects for private investors and exploring monetization of brownfield assets to attract risk-averse capital.
As the NHAI continues to make progress in unlocking private funds through asset monetisation, policymakers must strike a balance between attracting private investment and ensuring sustainable infrastructure financing policies to safeguard against ad hoc measures that could deter potential investors.
