Highway road map: Bidder selection criteria for BOT projects may ease

Under HAM, the central government pumps in 40 per cent equity in the project
To speed up the momentum of private sector investment in highways, the new bidding documents for build-operate-transfer (BOT) projects may soften the qualification criteria for bidders, including their financial capabilities. 

Under the earlier rules, if two companies formed a consortium to take part in a tender, the net worth or the financial muscle of both the companies needed to meet the minimum criteria. Now, just one company can meet the requirement. 

Essentially, small or mid-size companies which had taken up the hybrid-annuity mode (HAM) of construction will now be able to take part in the BOT tenders.

“Earlier, the practice was that if there is a joint venture and one company had a 74 per cent stake and the other a 26 per cent, their financial worth requirement should be in proportion to their stake,” said Jagannarayan Padmanabhan, director and practice lead, transport and logistics at CRISIL.

Soon after taking charge as Road Transport and Highways Minister, Nitin Gadkari said the government would look at reviving the BOT model. Reviving it, he said, would bring in private investment, making the sector less dependent on the government exchequer.

Under BOT, private players build, operate and maintain the road for a specified period of time before transferring the asset back to the government. In the case of HAM, the central government bears 40 per cent of the project cost and the remaining amount is arranged by the developer.

The revision or tweaking of documents for BOT becomes essential in the current scenario as the government moves the focus away from the HAM model, which was the preferred mode for highway projects in the last few years.

Under HAM, the central government pumps in 40 per cent equity in the project while the remaining 60 per cent is arranged by the concessionaire. The banks had become reluctant to lend to such projects as the companies had stopped putting in their own equity, relying instead on government funding.

The pool of banks that could lend for infrastructure projects shrunk further after the Reserve Bank of India put as many as 11 public sector banks under prompt correction action last year, leading to restrictions in lending. The action was taken due to the non-performing assets crisis at these banks. However, a few of the banks were later taken out of the RBI’s Prompt Corrective Action list.

That brought the government’s focus back to the BOT contracts. Earlier, BOT projects faced land acquisition and other regulatory challenges. Investors eventually lost interest. This is why the government is working on new guidelines, which should be out soon.

Besides the financial capability requirement, the government is also looking at a proposal allowing a construction company to sell its project to another firm after completing it and operating it for two years. It is learnt that such an amendment is being considered to attract international participation in the sector.

The exit clause will allow road operators to bring in foreign investors after construction.

On the amendment to the BOT regulations, Gadkari’s ministry and the National Highways Authority of India have had several rounds of discussions.  Through the revival of BOT, the share of such projects in NHAI’s overall project mix will go up. Currently, the mix is around 45 per cent each for HAM and EPC, while the remainder is BOT.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel