Aggressive bidding to hit future road projects
Equity returns to be down to 14% from the earlier 16-18%
The heightened competition in bidding for toll road projects is expected to hit the returns for the developers and the return on equity is expected to drop to 14 per cent from the earlier 22 per cent. According CRISIL Research, the attractiveness of the projects has increased, with the government speeding up land acquisition, providing an exit option in the licensing agreement, and awarding lucrative stretches from Phase III projects (conversion of two-lane highways to four-lane) and Phase V projects (four-lane highways to six-lane) of the National Highway Development Programme (NHDP).
The average number of bidders per project has, therefore, increased to 25-30: almost six times the number of bidders for projects awarded before 2009. “With aggressive bidding driving up project costs, the newer projects will earn lower returns. In most of the bids for the newer projects, developers have been offering a premium — a committed annual payment to the government over the term of the project. In 2011-12 almost 65 per cent of the projects were awarded on a premium basis, compared with 25 per cent in 2008-09. The premium amounts even exceeded the project cost in some NHDP Phase III and V projects, for which bidding was particularly aggressive. CRISIL Research expects the higher premium to bring down the average equity returns to about 14 per cent,” said Prasad Koparkar, Senior Director, CRISIL Research.
The research added that the toll road projects that were awarded on a build-operate-transfer (BOT) basis, before 2009, could earn an average equity return of 22 per cent — developers, typically, target a return of 16-18 per cent while bidding. The 23 BOT toll road projects considered in this study form one-fourth the length of BOT toll road projects operational in the country. “In most of these 23 projects, fewer bids per project kept bid amounts modest, while higher than expected growth in traffic boosted toll revenues. The degree of competition was modest for projects awarded before 2009. On an average, five developers bid for each project, given uncertainties in the policies that governed BOT toll road projects,” the report noted.
Developers, for instance, were unsure whether the government would transfer them land in time for construction. Also, the absence of an exit option meant that developers could not sell their entire equity stake in the projects. The fewer bidders kept bid amounts modest and project costs moderate. Healthy growth in traffic boosted toll revenues for these projects. On an average, toll revenues for the 23 projects increased by 10-12 per cent over 2008-09 to 2010-11. CRISIL Research has assumed future traffic growth at a modest 6 per cent through the remainder term of the projects. At this rate, equity returns for these projects are likely to exceed 20 per cent, the study said. High inflation also boosted toll revenues. “Inflation, measured by the wholesale price index (WPI), averaged 7 per cent between 2009-10 and 2011-12. Because changes in toll rates are linked to movements in the WPI, the average increase in toll rates was similar to the increase in the WPI during the period,” explained Ajay D’Souza, Director, CRISIL Research.