Asset Recycling: Cabinet approves toll-operate-transfer model

Cabinet approves toll-operate-transfer model

In August 2016, the Cabinet Committee on Economic Affairs (CCEA) approved the toll-operate-transfer (TOT) model to monetise public-funded operational toll-based projects which have been generating revenues for a minimum of two years after the commercial operation date. The Ministry of Road Transport and Highways anticipates garnering about Rs 700 billion of funds through the sale of toll collection rights on toll plazas. These funds are expected to be deployed for the execution of projects on various models and will augment the financial capacity of the National Highways Authority of India (NHAI).

How the model works

Under the TOT model, the rights of toll collection on operational public-funded national highway stretches will be given to a private investor, developer or institutional investor for a specific duration, preferably long term (30-year concession), against an upfront payment to the government. Besides, during the contract tenure, the operations and maintenance (O&M) responsibility will remain with the selected developer/investor. Technical and financial capabilities will define the pre-eligibility criteria for the selection of the private entity.

NHAI plans to auction the project stretches in bundles to ensure a minimum investment size of $100 million-$150 million and physical proximity of stretches will also be a consideration.

The TOT model is aimed at overcoming the key limitations of the operations, maintenance and tolling (OMT) model. These limitations include a relatively short concession period of six-nine years depending on when the major periodic maintenance is due, the restriction of participation to contractors and developers only, and a high level of exemptions.

Globally, the TOT model has already been tested in Chicago, Puerto Rico, Indiana and Malaysia with concession periods ranging between 40 and 99 years and is deemed to be 100 per cent risk-free for investors and the government. In these cases, the complete responsibility of O&M of the road lies with the TOT concessionaire.

Key benefits

From the government’s point of view, the TOT model is likely to be beneficial in securitising future cash flows which can be utilised for the creation of new assets. It will simultaneously aid in reducing the O&M burden on NHAI for operational projects.

In a major departure from the OMT model, besides developers and contractors, the TOT model also offers a plethora of participation opportunities to a new vertical of developers specialising in O&M of highways. It will also open the doors to other categories of investors such as institutional investors (including pension funds, insurance funds and sovereign funds) willing to invest in low-risk assets. Although these players are averse to taking construction risks, they are reasonably well equipped for making long-term investments in road infrastructure. Besides, the involvement of private players will be useful in ensuring efficient output and plugging the gaps associated with leakages in toll collection.

According to reports, the Canada Pension Plan Investment Board, Macquarie Group Limited, Brookfield Asset Management, Inc. and Gammon India Limited, among others, have evinced interest in India’s TOT model.

Besides, in February 2016, the Abu Dhabi Investment Authority, a sovereign wealth fund of the emirate, expressed willingness to invest

Rs 350 billion in 50 highway projects in India on a TOT basis. This is reflective of the zeal and long-term investment appetite of private players to engage in the sector. The decision of whether to award these projects in a portfolio or on a single-project basis is being considered. The upfront fee that the private partner will pay will be calculated based on future toll collection projections.

Progress so far

The government has over 100 operational toll roads constructed through public funds for which NHAI collects toll revenue. Seventy-five operational national highway projects have already been identified for potential monetisation using the TOT model. Of these, the majority are in the medium traffic density corridor. Reportedly, these 75 projects generate around Rs 27 billion in toll annually. In August 2016, the authority issued a request for qualification for the pre-qualification of agencies to prepare a report on the physical condition of national highways under consideration for award under the TOT model. As per recent reports, NHAI is looking at floating tenders to monetise road assets in the next two-three months.


The long-due TOT model looks promising on paper. While it is too early to weigh its actual benefits, to ensure sound implementation, clar-ity around the model is a must. Issues related to the duration and uniformity of concession periods, minimum portfolio size, proposed termination payment clause, and capacity augmentation after project award need to be tackled.

The increased focus of the government on the roads and highways sector is likely to increase the number of public-funded operational highway projects in the coming years. Thus, the effective implementation of the TOT model could be a win-win situation for all stakeholders in the sector.