The Hindu Business Line : BOT road cos keen on cost cutting methods

Cost cuts,
The extent of costs cut might range between 5 and 20 per cent.
Firms look at lowering capital cost by design changes within alignment.
Costs are lowered by increasing the debt-equity ratio in the project.

BOT: OPTIMISING COSTS

New Delhi , Aug 17

With increasing competition, companies in the business of build-operate-transfer (BOT) roads are engaging consultants to reduce their project costs through design changes and financial re-engineering, amongst others.

The extent of cost reduction through such measures ranges between five per cent to even 20 per cent, say experts.

Feedback Ventures, which offers finance and engineering advisory services, has seen a significant growth in such business.

"Both large and small companies are looking at cost optimisation through various means at pre-bid stages, as well as post-bid stages," said Mr Parvesh Minocha, Managing Director, Feedback Ventures.

The firm's turnover in this segment has gone up by over 100 per cent last year, he added.

They get at least two queries a month from various parties involved in BOT road projects such as financial institutions and special purpose vehicles, he said.

DESIGN OPTIONS

Firms look at lowering capital cost by design changes within alignment. "We do a life cycle cost analysis, explore redesigning options to expedite construction within the bid parameters and try enhancing the aesthetic appeal of projects at times as better aesthetics need not necessarily be more expensive," he said.

At times, certain design changes can be adopted to expedite construction. Faster construction implies toll collection for improved roads start earlier than expected, thus making the project more attractive, said Mr Minocha.

FINANCE

According to Mr Rajesh Abraham, Vice-President, Ernst & Young, "Several firms in the BOT segment approach us for cost cutting through financial re-engineering. Costs are lowered not just by lower cost of funds, but also by increasing the debt-equity ratio in the project."

At the initial (construction) stage of a project, firms usually get 70-80 per cent of the cost as debt. However, when the operations start and toll revenues flow in, the project risk usually goes down.

This helps the BOT operators raise higher funds at a higher debt-equity ratio, Mr Abraham said. Thus, even in the backdrop of increasing interest rates, firms would still find it attractive to go for finance re-engineering to increase the debt part of total project cost.

COST REDUCTION

The extent of cost reduction varies and depends on project size and design given by consultants hired by National Highways Authority of India (NHAI). "Costs are reduced generally between five per cent to 15 per cent," said Mr Minocha adding that at times, there is very little space to change design within parameters to lower cost.