High interest rates and financial closure woes don’t seem to have made infrastructure firms averse to build-operate-transfer (BOT) contracts.
The long-term nature of BOT contracts and the expected reduction in interest rates mean they are unlikely to be ditched by infrastructure companies for engineering, procurement & construction (EPC) or cash contracts.
V D Mhaiskar, chairman and managing director of Mumbai-based IRB Infrastructure Developers, said, “Liquidity was an issue about a month-and-a-half back and interest rates will soften in a while.” BOT projects comprise over 90% of IRB’s Rs 3,800-crore order book.
Banks lend to the infrastructure sector at 13-16%. This may fall after 14 public sector banks cut their prime lending rate by 75 basis points this month.
Yogen Lal, chief operating officer of Unity Infraprojects, said though it is difficult to get funding for an existing BOT project, new projects are a different issue. “The awarding of a BOT project takes 6-9 months and financial closure another 6 months. In a year, things will hopefully be better,” he added. Unity Infraprojects’ portfolio consists entirely of EPC contracts. But its wholly-owned subsidiary, Unity Infra Assets, is looking at opportunities in the BOT space and has qualified for a few projects.
A BOT contract is one where an infrastructure firm bids for a project and, after winning it, raises funds for it, builds it, operates it for a specified period and then returns it to the government. Such projects are vulnerable to interest rate volatility and, in case of ports or highways, density of traffic.
On the other hand, an EPC or turnkey contract is one where the infrastructure company conceptualises and develops a project from scratch and hands it over to a third party.
A cash contract is one where the firm develops a project designed by another entity.
Both EPC and cash contracts don’t involve much risk as the firms pass on any increase in costs to the third party.
Praveen Sood, chief financial officer of Hindustan Construction Company, feels this is the right time to bid for BOT projects. “Commodity prices have fallen and when rates come down, we stand to benefit because we bid in a high interest rate scenario,” he said. Cash contracts form a major chunk of HCC’s portfolio.
Quite a few BOT projects will be up for grabs soon, with National Highways Authority of India (NHAI) projects worth Rs 60,000 crore in various stages of bidding. The Airports Authority of India (AAI) has set aside Rs 12,000 crore for developing airports through public-private partnership (PPP) and 9 National Maritime Development Programme port development projects worth Rs 5,000 crore will also be awarded this fiscal.
H S Bharana, chairman of Era Group, said his firm is very much on the lookout for such projects due to a new clause in BOT contracts. “There is a review after 75% of the stated time has passed and if the firm hasn’t recovered the capital, the period is extended,” Bharana said. About 20-25% of Era’s Rs 1,500-crore portfolio is BOT contracts.
Source:
http://www.dnaindia.com/report.asp?newsid=1209391
The long-term nature of BOT contracts and the expected reduction in interest rates mean they are unlikely to be ditched by infrastructure companies for engineering, procurement & construction (EPC) or cash contracts.
V D Mhaiskar, chairman and managing director of Mumbai-based IRB Infrastructure Developers, said, “Liquidity was an issue about a month-and-a-half back and interest rates will soften in a while.” BOT projects comprise over 90% of IRB’s Rs 3,800-crore order book.
Banks lend to the infrastructure sector at 13-16%. This may fall after 14 public sector banks cut their prime lending rate by 75 basis points this month.
Yogen Lal, chief operating officer of Unity Infraprojects, said though it is difficult to get funding for an existing BOT project, new projects are a different issue. “The awarding of a BOT project takes 6-9 months and financial closure another 6 months. In a year, things will hopefully be better,” he added. Unity Infraprojects’ portfolio consists entirely of EPC contracts. But its wholly-owned subsidiary, Unity Infra Assets, is looking at opportunities in the BOT space and has qualified for a few projects.
A BOT contract is one where an infrastructure firm bids for a project and, after winning it, raises funds for it, builds it, operates it for a specified period and then returns it to the government. Such projects are vulnerable to interest rate volatility and, in case of ports or highways, density of traffic.
On the other hand, an EPC or turnkey contract is one where the infrastructure company conceptualises and develops a project from scratch and hands it over to a third party.
A cash contract is one where the firm develops a project designed by another entity.
Both EPC and cash contracts don’t involve much risk as the firms pass on any increase in costs to the third party.
Praveen Sood, chief financial officer of Hindustan Construction Company, feels this is the right time to bid for BOT projects. “Commodity prices have fallen and when rates come down, we stand to benefit because we bid in a high interest rate scenario,” he said. Cash contracts form a major chunk of HCC’s portfolio.
Quite a few BOT projects will be up for grabs soon, with National Highways Authority of India (NHAI) projects worth Rs 60,000 crore in various stages of bidding. The Airports Authority of India (AAI) has set aside Rs 12,000 crore for developing airports through public-private partnership (PPP) and 9 National Maritime Development Programme port development projects worth Rs 5,000 crore will also be awarded this fiscal.
H S Bharana, chairman of Era Group, said his firm is very much on the lookout for such projects due to a new clause in BOT contracts. “There is a review after 75% of the stated time has passed and if the firm hasn’t recovered the capital, the period is extended,” Bharana said. About 20-25% of Era’s Rs 1,500-crore portfolio is BOT contracts.
Source:
http://www.dnaindia.com/report.asp?newsid=1209391
