Positive Start

Experience and potential under TOT model

In August 2016, the Cabinet Committee on Economic Affairs authorised the monetisation of public-funded national highway projects through the toll-operate-transfer (TOT) model. Under this arrangement, the National Highways Authority of India (NHAI) is authorised to lease operational and revenue generating road stretches for a predetermined concession fee and period.

The first bundle of projects under the TOT model was awarded to a joint venture of Sydney-based Macquarie Group and Ashoka Buildcon Limited for Rs 96.81 billion, which was 1.5 times the authority’s estimate of Rs 62.58 billion. Financial closure for the first bundle of nine stretches, totalling around 681 km of roads in Andhra Pradesh and Gujarat, was achieved in August 2018. Ashoka Buildcon Limited will undertake the operations and maintenance (O&M) of the stretches. The equity component of the project will be financed from the $3 billion raised by the Macquarie Asia Infrastructure Fund II. The first bundle has resulted in a total cash flow of more than Rs 105 billion into the road sector.

In August 2018, NHAI invited bids for the second bundle of TOT projects. The bundle elicited a response from three bidders – Cube Highways and Infrastructure Private Limited, Adani Infrastructure and IRB Infrastructure Developers Limited. As against an initial estimated concession value (IECV) of Rs 53.62 billion, the highest bid stood at Rs 46.12 billion from Cube Highways. Therefore, NHAI annulled the bidding process and decided to reinvite bids after rebundling. However, this bidding process was perceived as a fairly successful one as the bids received were of good quality. The highest bid was only 14 per cent lower than the IECV. Besides, another possible reason for the lacklustre response to the second bundle was its relatively higher IECV as compared to the first one.

At present, NHAI is targeting Rs 49.95 billion from the monetisation of the third bundle. It has extended the deadline for receiving bids by a month to October 2019 on demand from investors. It plans to monetise nine highway stretches totalling 566.27 km in Uttar Pradesh, Bihar, Jharkhand and Tamil Nadu in the third tranche under the TOT model. This third tranche is particularly significant for the authority as it comes after an unsuccessful second bundle. The authority has invited bids for the fourth TOT bundle for which the last date of bid submission is January 14, 2020. So far, NHAI has evaluated road stretches of around 5,000 km to be offered in the TOT mode. It has finalised the fourth and fifth bundles for asset recycling as well. Reportedly, there are plans of potential monetisation of around 15,000 km of road stretches by 2025. The authority has sought request for proposals for empanelment of agencies for preparation/ submission of reports on inventory of highway assets and assessing the current physical condition of the national highway stretches under consideration for award on TOT.

Overall, developers as well as lenders have welcomed this new privatisation route adopted by the government to improve efficiency and conserve funds for provision of public goods. While some argue that shorter concession periods are better from the investor’s point of view, it should be kept in mind that shorter concession periods have their own drawbacks. They do not leave any scope for secondary markets once the project has been awarded, leaving investors with limited room to bail out later. Moreover, longer concession periods provide immunity to the investors from temporary slowdowns by providing sufficient time to ride out the trough. Also, unlike the build-operate-transfer model, TOT contracts do not inherit legal and financial antecedents of the project, making it more lucrative for investors. This makes the concession less risky, after discounting for operational and traffic risks. Moreover, NHAI has successfully played the part of a facilitator in ensuring smooth implementation of the first bundle under TOT, making it widely acceptable.

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