Views of L.P. Padhy

“The first TOT bundle was successful in attracting huge investor interest”

The government has embarked upon an ambitious programme of constructing 66,100 km of roads under the Bharatmala Pariyojana. In order to achieve this target, large-scale funding is required and, therefore, several innovative means of raising funds are being explored. One of them is asset monetisation. At a recent conference on Road Development in India organised by Indian Infrastructure, L.P. Padhy, Chief General Manager, National Highways Authority of India (NHAI), spoke about the need for the toll-operate-transfer (TOT) model in the Indian context, the bidding experience with respect to the first TOT bundle and the size and scope of upcoming opportunities… 

So far, road construction in the country was being primarily undertaken through four models – the engineering, procurement and construction (EPC) model; the build-operate-transfer (BOT) (toll) model; the BOT (annuity) model; and the hybrid annuity model (HAM). The relatively recently introduced HAM model received an overwhelming response, with most of the NHAI projects being currently undertaken through this model. With the highway projects with high traffic density already being bid out through the BOT (toll) model and given the limitations associated with the HAM model, the government has undertaken monetisation of operational publicly funded national highway projects under the globally successful TOT model.

All about TOT model

Asset recycling is a concept whereby the operations of existing revenue-generating public assets are entrusted to a private player for a specified concession period, in order to unlock the value of these assets. Bidding out projects through this model generates an upfront concession value based on the unexpired cash flow of these assets, thereby helping the asset-controlling infrastructure authority meet its capital requirements for priority development to serve the social and economic needs of the sector. Besides, it also plugs the gap in operational efficiency by bringing in international expertise in the operations and maintenance (O&M) of existing assets.

From an investor perspective, the TOT model provides an attractive investment opportunity given the zero construction risk, relatively stable cash flows, long concession period and huge scope for return optimisation through O&M synergies across the offered stretches. NHAI is expected to indicate the initial estimated concession value (IECV) to the bidders based on traffic, toll and cost projections. The model also de-risks investor returns through a change in the concession period in the event of high toll variation, with traffic sampling being done at the end of the 10th year and 20th year of the concession agreement, to assess the toll variation compared to NHAI projections. Therefore, under the TOT model, instead of targeting the traffic, the authority is aiming for a target revenue.

With regard to capacity augmentation, the investor will be de-risked from any construction risk as the authority may increase the capacity of the highway at its own cost in case of an increase in traffic. The concessionaire will have the right to participate in the bid process and match the first-ranked bid to implement the project. A change in ownership is allowed under the model only after the first 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 to the agreement can be proposed so as to maintain the same operating environment for the concessionaire. The model also has provisions for termination payment, taking into consideration the event of a default on the part of the concessionaire/ authority as well as force majeure.

In order to monitor engineering/safety improvements and O&M of each of the highway projects, an independent engineer will be appointed. Further, any difference or disagreement between the authority and the concessionaire will be settled in accordance with the dispute resolution procedure provided in the concession agreement. This procedure will be based on a three-tier mechanism of mediation, conciliation and arbitration.

The bidding for the TOT projects is being carried out on an e-tendering platform involving a single-stage two-part process. NHAI will indicate the IECV as part of the request for proposal document and the bidders will be given up to three months to conduct due diligence. The upfront concession fee payable by the concessionaire to NHAI will be the bid parameter, with the concessionaire being given 120 days to make the payment. The concessionaire will be selected on the basis of its technical capability (relevant to the O&M of highway projects) and financial capability of the bidding entity (either individually or in a consortium). The bid security amount will be 1 per cent of the IECV.

Criteria for bundle selection

Under the first bundle offered under the TOT model, NHAI bid out nine national highway stretches spanning a total length of 680 km. Of these, seven were EPC projects which had been operational for more than five years, while the remaining two were BOT (annuity) projects, for which the concession period will expire in the next one-two years. These large contiguous stretches, located in Andhra Pradesh and Gujarat, have a proven history of tolling and a record of stable revenue collection over the past two-three years.

The bundling has been done taking several aspects into consideration, and will enable the concessionaire to achieve economies of scale and continuous synergy in operations. In order to provide accurate and reliable data to assist bidders with the proper evaluation of highway assets, NHAI has undertaken a 360-degree asset condition survey by utilising state-of-the-art technology, with minimal dependence on manual investigations. The asset condition survey has been done mostly by using the latest technology-driven tools such as network survey vehicles, LiDAR and falling weight deflectometers. Further, a systematic approach has been used to analyse data and even the methodology to calculate IECV has been shared upfront with the bidders. This is one step which has definitely given a boost to investor confidence.

Bidding experience

The first TOT bundle was successful in attracting huge investor interest, with the project being finally awarded to a joint venture of the Macquarie Group and Ashoka Buildcon Limited, for Rs 96.81 billion. This was around 1.53 times higher than NHAI’s estimated value of Rs 62.58 billion. Substantial interest in this bundle was also shown by foreign investors, with players such as Brookfield Asset Management and Roadis also participating in the bidding process. The first bundle has resulted in a total cash flow of over Rs 105 billion into the Indian road sector, which is much higher than the initial estimated investment.

Key success factors

The success of the first TOT bundle can be attributed to the extensive consultation undertaken with all the stakeholders (potential bidders, lenders and international road operators) at every step of the project structuring process. The other factors include state-of-the-art technology-driven condition survey of assets to ensure information symmetry; selection of revenue-stable and attractive projects to reduce traffic risk for bidders; and expeditious approval from the inter-ministerial committee to bring about the requisite changes in the bidding documents in order to mitigate the issues being faced by stakeholders. One of the major changes made to protect the interest of lenders was the inclusion of provisions for an escrow agreement. Further, for investment management funds, committed capital available for immediate deployment was also considered as a part of their financial strength. In addition, NHAI also undertook extensive marketing of the TOT model in order to reach out to international players.

Upcoming opportunities

Given the success of the first TOT bundle, NHAI has bid out the second bundle comprising eight stretches under the model. These stretches span a total of 586 km, and have an estimated value of Rs 53.62 billion. Of these, three stretches each are in Rajasthan and West Bengal, while the remaining two are in Gujarat and Bihar. Further, NHAI has already carried out technical due diligence for another 27 packages spanning a total of 1,053 km. These have an estimated value of $1.7 billion.

The way forward

NHAI’s successful experience has demonstrated that if a project is well conceptualised in terms of size, risk management, high quality data dissemination and adaptable contracting framework, then it is quite feasible to attract global investors for asset recycling.

Taken together, the upcoming bundles provide an investment opportunity to the tune of $2.5 billion, and are likely to attract greater interest from both domestic and international investors. This augurs well for the extensive road construction programme embarked upon by the government.


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