Road construction: BOT model may not work in current conditions

As efforts to revive the economy gain pace, the Centre is right in trying to boost the road construction sector due to its employment generation capability and its GDP multiplier effect. It is also obvious that the Centre’s dire financial position does not leave any room to increase its capital expenditure and, worse, even to meet the budgeted expenditure for FY21, making public-private partnerships practically the only way out of this situation. Among the PPP road construction models, the Build, Operate and Transfer (BOT) model lays the least financial burden on the Centre, and therefore the focus is now on attracting bids for these projects. An inter-ministerial group has approved many significant changes to the model concession agreement for building highways under the BOT model. The most important change is to assess the revenue of the project every five years, instead of 10 years prescribed currently, so that the concession period can be adjusted if there is a significant decline in traffic. With many projects held up due to issues relating to land acquisition, the model agreement now lays down that the work order shall be issued only after procuring 90 per cent of the land. Setting up a dispute resolution mechanism and requiring the appointment of an independent engineer are other changes made to the agreement.

The changes are in the right direction, but may not suffice in generating interest. Road construction players have been under stress over the last few years with fewer orders from the government and decline in traffic due to the economic slowdown. The ongoing pandemic has further impacted construction companies, with government orders drying up, tight cash-flows and labour shortages. The stretched balance sheets of the companies do not allow them the leeway to take on additional debt to finance the initial cost of construction, which BOT projects entail. With revenue, in the form of toll revenue, flowing only after completion of construction, these projects are the least preferred. Companies instead prefer the Hybrid Annuity Model, wherein the NHAI bears 40 per cent of the initial construction cost; or the Engineering, Procurement and Construction model, where the NHAI bears the entire cost upfront.

The urgency of the Centre to move companies to BOT projects is also due to the stretched balance sheet of the NHAI, with debt exceeding ₹2.2-lakh crore. Banks have been wary of lending to road construction players for some time now, due to the higher re-payment risk. The moribund state of bond markets — another source of long-term financing — has also hit companies hard. Mutual funds, having burnt their fingers with the debt of construction companies, are also more wary now. Some companies have been hiving off projects, two years after completion; but this deprives companies of good revenue-generating projects. Securitisation and re-financing of debt is an option that some companies are currently adopting to reduce debt. The Centre, too, should try to make other long-term financing options available to companies before making them take on more debt.

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