Risks in Financing BOT Roads

Why in news?

The National Highway Authority of India (NHAI) has planned to award at least 8% of the targeted road development for the current fiscal through Build-Operate-Transfer (BOT) route.

What is a Build-Operate-Transfer (BOT) Contract?

• A build-operate-transfer (BOT) is a Public Private Partnership (PPP) model used to finance large projects, typically infrastructure projects developed through public-private partnerships.
• BOT projects are normally large-scale, greenfield infrastructure projects that would otherwise be financed, built, and operated solely by the government.
• Under a build-operate-transfer (BOT) contract, an entity (usually a government) grants a concession to a private company to finance, build, and operate a project for certain period.
• After that period, the project is returned to the public entity that originally granted the concession.

What are the issues of concern?

• Recently, credit rating agency ICRA published its study of 120 BOT road projects that have defaulted during the last decade.
• The Enforcement Directorate (ED) attached assets of the promoters of Ranchi Expressway Ltd, on the charges of fraud and money laundering.
• The study by ICRA has revealed that 70% of the sample projects defaulted during the operational phase, largely on account of lower than envisaged traffic and authority-related issues.
• Only one-fourth of the projects could come out of default and nearly 16% of the projects were terminated.

What are the risks associated with BOT model?

• Risk during execution stage
  • Ability of the concessionaire/sponsor to raise the requisite funding
  • Timely availability of right-of-way and various approvals including environmental clearances
  • Changes in design/scope of work
  • Terrain conditions
  • Local government or judicial interventions
  • Cost-overrun
• Risks after the operationalization
  • Revenue shortfall
  • Flawed traffic projections which are made in the absence of any reliable historical data
  • Mortality of a long-term loan
  • Development of alternative routes and modes of transport
  • Local political conditions
  • Natural calamities
  • Changes in laws
  • Poor maintenance

References

1. The Hindu Businessline│ It’s risky financing BOT roads
2. Investopedia│ Build-Operate-Transfer Contract
3. LMS Indian Economy│EPC Model

Quick facts

Engineering, Procurement and Construction (EPC) model

• This is a PPP model for the development of infrastructure projects especially highways.
• Under this model, the cost is completely borne by the government.
• Procurement of raw material and construction costs are met by the government.
• The private sector’s participation is minimum and is limited to the provision of engineering expertise.
• Issue - High financial burden for the government.

Hybrid-Annuity Model (HAM)

• HAM is a mix of the Engineering, Procurement and Construction (EPC) and Build, Operate, Transfer (BOT) models.
• HAM combines 40% EPC and 60% BOT-Annuity.
• It was introduced in 2016 to recover investments in road infrastructure projects.