Aggressive bidding to hurt impressive earnings of BOT toll road project

Toll road projects awarded on build-operate-transfer (BOT) basis, before 2009, could earn an average equity return of 22 per cent, substantially above the 16 - 18 per cent that developers, typically, target while bidding, says a new report by Crisil Research.

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 and the uncertainity that developers face over the government transferring land in time for project execution.

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 reveals.