At a recent conference on Operations, Maintenance and Tolling in the Road Sector organised by India Infrastructure, L.P. Padhy, Chief General Manager, Technical, National Highways Authority of India (NHAI), spoke about the need for asset recycling in the road sector and the advantages it has to offer…
In India, national highways form 2 per cent of the total road network, while they carry 40 per cent of the passenger traffic and more than 60 per cent of the cargo traffic. This emphasises the need for the development of national highways in the country. Initially, the build-operate-transfer (BOT) model was quite successful in the country. However, once the high density corridors were exhausted, followed by a global recession and the resulting reluctance on the part of bankers, lenders, etc. to finance such projects, the response to BOT projects reduced. This saw the advent of the hybrid annuity model (HAM).
The HAM advantage
Under HAM, 40 per cent of the construction cost is provided by the government through viability gap funding while 60 per cent of the cost is arranged by the concessionaire. Operations and maintenance (O&M) payments are made to the concessionaire along with annuity by NHAI, in accordance with the amount quoted, which is inflation indexed. As a result, the concessionaire’s risk has come down significantly.
Asset recycling through TOT
In order to undertake large-scale road development in the country, new avenues of financing need to be explored. This brought to the fore the need for securitising cash flows for undertaking investments in network expansion. Under the toll-operate-transfer (TOT) model, NHAI plans to lease revenue generating national highway assets to private entities. These entities will then be allowed to collect toll and operate the project for a specified duration, which at present is pegged at 30 years, in return for a fee. The concessionaire faces minimal risks as it is not responsible for any development or construction works. Further, the initial estimated concession value will be stated upfront in the bidding document as will the assumptions taken into consideration to arrive at the figure.
Long concession period: Despite due diligence conducted by NHAI while making traffic forecasts, 30 years is a long period of time to predict traffic growth with reasonable accuracy. In order to address this issue, NHAI will benchmark the revenue that the private player must earn as per the former’s assessment on the target dates (10th and 20th year). If the variation is beyond ± 20 per cent, then the concession period will be adjusted accordingly.
Capacity augmentation: The cost of capacity augmentation of a leased stretch will be borne by NHAI. The concessionaire will have the full right to bid for the project. In case of any other agency securing the contract, the concessionaire will have to coordinate with it till the project is completed.
Change in ownership/law: Under the model, a change in ownership is allowed 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, amendments could be proposed to the agreement so as to maintain the same operating environment for the concessionaire.
Termination payment: In the event of a contract being terminated due to a default by NHAI, the authority will have to pay 105 per cent of the unexpired cash flows to the concessionaire. In order to give confidence to lenders, the termination payment will be made even in case the concessionaire defaults. In such a scenario, NHAI will retain the performance security and pay 70 per cent of the unexpired cash flows to the concessionaire.
Asset recycling has been successfully adopted in many countries such as the UK, the US and Australia. In India, the move is expected to boost operational efficiency by attracting developers who specialise in O&M of highways. Further, NHAI has defined service-level agreements in a calibrated manner and clearly specified the methodologies adopted for the measurement of O&M indices, leaving no room for misinterpretation by either the concessionaire or the authority. The model will also attract long-term investors who are averse to taking construction risks but are well equipped for making long-term investments in the road sector.
The way forward
Under the first TOT model, three highway projects spanning 240 km in Gujarat and six highway projects spanning 420 km in Andhra Pradesh have already been bid out. The last date for the submission of bids is January 9, 2018. Based on the domestic and international response to the first bundle, NHAI plans to accordingly strategise the roll-out of highway stretches in the future. The TOT model will go a long way in creating opportunities for the private sector and provide for efficient O&M of highways, while at the same time channelising capital inflows for creating new road infrastructure.