More bidders, high cost to trim returns on BOT projects: Crisil

June 4, 2012

Aggressive bidding and higher premium quoted by developers for new toll road projects on BOT (Build-Operate-Transfer) basis are expected to bring down the average return to 14 per cent, according to a survey by ratings agency Crisil.
Projects awarded before 2009, however, earned an average equity return of 22 percent for developers, the survey found.

“Aggressive bidding and sharp increase in developers’ costs, due to the high premium amounts, is likely to take a toll on future BOT road projects. It is expected to bring down the average equity return of the newer BOT projects to about 14 percent,” the agency said in a report.
With aggressive bidding driving up project costs, the newer projects will earn lower returns. In most bids for newer projects, developers have been offering higher premium (a committed annual payment to the government over the term of the project), the report noted.
According to the study, in case of 23 BOT toll road projects which were awarded before 2009, fewer bids had kept bid amounts modest while higher than expected growth in traffic boosted toll revenues.
Noting that in FY12, almost 65 per cent of the road projects were awarded on premium basis, compared to 25 per cent in fiscal 2009, the survey says, “The premium amounts even exceeded the project costs in some of the projects for which bidding was particularly aggressive. We expect the higher premium to bring down the average equity returns to about 14 percent,” Crisil Research’s senior director Prasad Koparkar said.
The survey also noted that the degree of competition was modest for projects awarded before 2009 with an average of five developers bidding for each project, given the uncertainties in the policies that governed these projects.
Uncertainty about transfer of land to developers by the government as well as absence of an exit option meant that developers could not sell their equity stake in these projects, kept bid amounts modest and project costs moderate, Crisil said.
However, with government speeding up land acquisition process, providing an exit option in the licensing agreement, and awarding lucrative highway stretches under the National Highway Development Programme, the bidding has become aggressive for new projects and the average number of bidders per project increased almost sixfold to 25-30 from that in 2009, the report found.

SOURCE: http://profit.ndtv.com