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106
MOTORINDIA
l
July 2012
Toll road projects guarantee good
returns: CRISIL Research
A study by CRISIL Research esti-
mates that toll road projects that were
awarded on 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 bid-
ding. 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 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 develop-
ers bid for each project, given uncer-
tainties in the policies that governed
BOT toll road projects. 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 traf-
fic growth at a modest six 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 reveals.
But increased competition has
turned bidding aggressive for newer
BOT toll road projects. The attrac-
tiveness of the projects has increased,
with the Government speeding land
acquisition, providing an exit op-
tion 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 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, de-
velopers have been offering a pre-
mium – 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
premium basis, compared with 25
per cent in 2008-09.
“The premium amounts even ex-
ceeded the project cost in some
NHDP Phase III and V projects, for
which bidding was particularly ag-
gressive. CRISIL Research expects
the higher premium to bring down
the average equity returns to about 14
per cent,” said Mr. Prasad Koparkar,
Senior Director, CRISIL Research.
w
road transportation
“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 WPI, the aver-
age increase in toll rates was
similar to the increase in WPI
during the period.”
– Mr. Ajay D’Souza
Director, CRISIL Research