The need for securitising cash flows for undertaking investments in network expansion has set the ball rolling for the introduction of the toll-operate-transfer (TOT) model. In a much-awaited move, the Ministry of Road Transport and Highways (MoRTH) approved the TOT model in August 2016.
The TOT model – A unique proposition
Under the model, the National Highways Authority of India (NHAI) plans to lease up to 75 revenue generating national highway assets, both engineering, procurement and construction (EPC) and build-operate-transfer projects, to private entities. These private entities will then be allowed to collect toll and operate the project for a specified duration – about a period of 30 years – in return for a fee. A change in ownership is allowed under the model only after two years of the concession period. Further, in the case of a change in law, if the concessionaire faces an increase/decrease in costs or other financial burden/gain, amendments could be proposed to the agreement so as to maintain the same operating environment for the concessionaire.
In the event of a contract being terminated due to a default by NHAI, the authority will have to pay 105 per cent of unexpired cash flows to the concessionaire. Meanwhile, in the case of termination due to the concessionaire’s default, NHAI will retain the performance security and pay 70 per cent of unexpired cash flows to the concessionaire. With regard to eligibility requirements, the bidder may be a single entity or a consortium of companies. However, no bidder applying individually or as a member of a consortium can be a member of another consortium. Besides, to provide accurate and reliable data to bidders, an effective technical due diligence has been undertaken to ensure proper evaluation of highway assets. Hence, the model essentially comes with low concessionaire risk due to the absence of any development or construction works and is being considered as a lucrative long-term investment opportunity.
Under the first TOT bundle, nine operational highway projects worth nearly Rs 62.5 billion have been put on the block. This includes three projects in Gujarat (around 240 km) and six projects in Andhra Pradesh (442 km). The last date for bid submission is January 9, 2018. Meanwhile, in a recent development, NHAI has decided to tweak the model to provide bidders with more options and a level playing field. Accordingly, it is planning to experiment with options such as reducing the concession period from 30 years to 20 years. Although the first round of bidding will follow the existing modalities, the second and third bidding rounds, to be conducted in the last quarter of 2017-18, will be based on the new options. The changes, however, require the approval of the Cabinet Committee on Economic Affairs.
The model has been well received by most of the industry stakeholders and has also been successful in attracting the interest of global players such as the Abu Dhabi Investment Authority, the Canadian Pension Plan Investment Board, the Macquarie Group, Temasek Holdings Private Limited, and other institutional investors from Europe and Asia.
The move is expected to provide an efficient operations and maintenance (O&M) framework requiring reduced involvement of NHAI in projects post the completion of construction. Besides, it will also create business opportunities for a new vertical of developers who specialise in O&M of highways, and long-term investors that are averse to taking construction risks but are adequately equipped for making long-term investments in road infrastructure. Further, the released funds can be utilised for priority development to serve social and economic needs.
In view of the government’s ambitious plans of increasing the national highway network to about 200,000 km in the next few years, the timing of the model’s introduction seems opportune. According to estimates, the new model is likely to generate funds to the tune of Rs 400 billion (CRISIL)/Rs 356 billion (ICRA) for the government. However, with the ministry repeatedly asserting that there is no dearth of money for the sector, greater clarity is required on the proposed use of the funds generated through this model.