Road and highway development has been a major focus area of the central government over the past few years, as evidenced by the significant growth in the national highway network. In a recent move, to safeguard the interest of all stakeholders, the Ministry of Road Transport and Highways (MoRTH) revised the model concession agreement (MCA) for build, operate, transfer (BOT) (toll) projects to address the challenges encountered during the execution, operational and termination phases. At a recent Indian Infrastructure conference, Praveen Sethia, founder and director, Infrastructure Advisors Private Limited, discussed the sector’s progress, the revised MCA amendments and the policy implications. Excerpts…
With over 15 years of dedicated experience in the roads sector, Infrastructure Advisors has established itself as a leading authority with public-private partnership (PPP) and finance expertise. The firm has expert insights to effectively navigate business, financial, technical, commercial, contractual, and legal issues. Notably, their PPP expertise extends beyond roads to encompass various other sectors, including multi-modal logistics parks, waste-to-energy, smart metering, ports, airports, solar energy, electric vehicles, mining, ropeway, affordable housing, Gati cargo terminal operations, waste management, food grain silos and transmission.
Sector progress and growth metrics
Over the years, the road sector has grown exponentially. There has been a significant increase in highway length, growing from 91,000 km in 2014 to around 146,000 km in 2023. Additionally, the government’s flagship programme, Bharatmala Pariyojana, is currently under implementation. The project was originally envisaged at an estimated cost of Rs 7 trillion; however, this has now escalated to Rs 14 trillion due to implementation delays and other hurdles. The total construction target under the programme is 35,000 km, of which approximately 75 per cent has been awarded and around 50 per cent of the work has been completed. The completion timeline has been extended to 2027; however, this is expected to be further extended. Approximately Rs 3 trillion has been infused into the sector by the government, with a similar amount also injected via commercial banks and investments. Bharatmala Pariyojana Phase II is currently at the planning stage. According to MoRTH, the detailed project report (DPR) is currently being prepared for around 5,000 km of roads.
In the road sector, the trend of mergers and acquisitions is encouraging, with funding of new projects.
In another development, the National Highways Authority of India (NHAI) has demonstrated success with PPP in the format of the toll, operate, transfer (TOT) model as well as the hybrid annuity model (HAM), instilling confidence among stakeholders in their upcoming initiatives to revive the BOT (toll) model.
Mapping bidding trends under HAM
The bidding period for HAM projects typically commences in October and extends until March. In recent years, with new players in the market, the bids received in the initial rounds have been relatively lower. This has led to road projects being awarded to new contractors instead of the established market leaders. In addition, key road players now often lower the project viability levels in order to secure more contracts and increase their order books during the month of February.
For example, to establish a benchmark, if the historical estimated project cost is considered as a reference point for bids, the quoted bid cost was approximately 120-130 per cent. Last year, this decreased to around 100-110 per cent. In 2023-24, the bids are being submitted at about 80 per cent of the estimated project cost. This raises questions about the contractors’ potential inefficiency during the past years, or the current state of ignorance over cost structure, both during the construction and operation period, in a quest to build the order book, given that financing of HAM projects is currently easy.
Abnormally low bids are now a widely recognised trend in the sector. The detrimental effects of this include poor construction quality, lack of ability to deliver projects on time, poor maintenance of roads and inadequate safety of road users.
MCA amendments for BOT
Under the revised MCA for BOT (toll) projects, there is now a provision for construction support, which would be specified for each concession agreement. The bidding criteria is the lowest equity support or the highest premium. Interestingly, premium payment, as per the provision of the revised MCA, takes precedence over the lenders’ dues, and this goes against the basics of banking and project financing.
Equity support is linked to the equity proposed to be invested by the concessionaires and varies from project to project. It is noted that equity support is restricted to 50 per cent of the concessionaire’s equity commitment and in certain cases, where a construction grant is not there, it could be 200 per cent of the equity of the concessionaire.
The concession period will now vary from 20 years to 30 years as per the revised MCA, with provisions for variation due to lower and higher traffic. During periods when traffic is low, increasing the concession period would result in an inability to pay the lenders. Unless supported by an increase in the debt repayment period, financial viability could be an area of concern.
There is ambiguity regarding the construction of additional tollways. As per the NHAI, if the concession is granted from, for instance, point A to point B, then unless the competing road connects point A to point B, it will not be considered a competing road or an additional tollway.
Moreover, a buyback clause has been proposed in the revised amendments. In case the traffic is high, the concession period will be reduced. During the reduced concession period, one would be required to recover the investment. Additionally, the compensation would be 80 per cent of the average toll collection on a monthly basis, multiplied by 75 per cent of the remaining concession period. The rationale for the lower multiple is yet to be clarified by the government.
There is also a provision for a shortfall loan in certain situations. However, this should be extended wherever there is a shortfall mainly on account of lower traffic, diversions, competing roads and additional tollways. Construction support, whether it is subjected to GST or not, is still yet to be clarified. The termination payment provision has been added, aligning with HAM during the construction period, which is a welcome move. Additionally, the debt due has been benchmarked.
Overall, the revised amendments are a positive move in terms of bringing back the design, build, finance, operate and transfer model.
Strategic measures
It is imperative to officially publish the drafts of DPRs and encourage pre-finalisation consultation, as demonstrated by the Uttar Pradesh Expressways Industrial Development Authority in the Ganga Expressway Project, where feedback from published draft DPRs was incorporated. The DPRs should explicitly include operations and maintenance costs as well as the base case business model of the concessionaire with details of the maintenance cost submitted at the time of financial closure aligning with the DPR cost. Additionally, bid evaluations should closely track the difference between the lowest and highest bids, ensuring reasonable pricing, and check for pending financial closure of the specific bidder and the ability to invest equity. Failing to implement such measures risks driving key industry players away
