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Identifying hidden risks in BOT projects

Background A2Z Cargo Handlers, one of the leading players in the Indian port sector, which has a presence at multiple ports in the areas of cargo-handling and stevedoring, was one of the shortlisted bidders for a new PPP project aimed at the development of a berth on BOT basis at a major port. The company wanted to take advice from sector consultants about the financial viability of the project and the possible bid ranges. In this regard, it appointed CRISIL Infrastructure Advisory (CRIS) to help assess the project attractiveness and guide it through the bid process.



CRISIL Infrastructure Advisory constituted a team comprising a blend of professionals with varied experiences in both the port sector as well as bid advisory in PPP projects.

The project encompassed an analysis from multiple perspectives to get a holistic picture of the project's overall attractiveness and the key risks involved.



The key commercial documents including the draft concession agreement were reviewed to evaluate the project contours and pertinent commercial and legal clauses and their potential implications. For the traffic analysis, the major traffic-contributing commodities were identified, by assessing the profile of the existing traffic and also the regional industrial setup. Traffic for each of the identified commodities was then forecasted using a combination of the bottom-up and top-down approaches. Cost was assessed to evaluate the estimates by the Authority by using a combination of the prevailing market rates and industry benchmarks. Tariff as set for the project by TAMP was benchmarked against competing facilities, to gauge the competitiveness of the new facility in terms of its cost attractiveness for users. The financial viability of the project was then assessed and the bid strategy proposed by keeping in consideration the profile of the competition and the overall trend in similar projects elsewhere in the country.



CRISIL Infrastructure Advisory used its in-depth understanding of the sector to identify and suggest potential opportunities and threats associated with the project. A few of the key insights included recommending an optimal commodity mix for revenue maximization through a statistical analysis involving multiple factors such as competition, cargo handling rates, realizable revenue and storage durations for individual commodity types. The tariff for cargo storage at the new facility was significantly higher than the local market rates and thus it involved a significant risk of users preferring competing facilities. To circumvent this, alternative storage solutions were recommended which could partly offset the risk. CRISIL Infrastructure Advisory assessed each of these and other factors threadbare. Thus, while from a higher level, the project appeared attractive on the back of strong traffic potential and good tariff margins, a more in-depth analysis brought out significant implementation risks that the project carried. CRIS prepared a risk matrix with various scenarios for likely returns and the risks associated with them. Based on the risk appetite of the client, CRISIL Infrastructure Advisory advised A2Z Cargo Handlers to not participate in the project.

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