The road sector in India has adopted the asset recycling concept through the toll-operate-transfer (TOT) model, with the aim of generating resources for future highway construction. Asset recycling has the advantage of low construction risk for the concessionaire. It also helps the asset controlling authority/department to meet its capital requirement for priority developments and plugs the gap in operational efficiency by bringing in international experience in operations and maintenance (O&M) of existing assets. However, growing market uncertainties on account of the ongoing COVID-19 crisis have significantly impacted the government’s asset monetisation plan.
The TOT model and amendments
The TOT model was introduced in 2016 to monetise publicly funded highways, where investors could make a one-time lump-sum payment in return for toll collection for a stipulated period of time. On August 3, 2016, the cabinet authorised the National Highways Authority of India (NHAI) to monetise publicly funded national highway projects (that are operational and have been generating toll revenues for at least two years after the commercial operations date) through the TOT model. About 75 such operational highways were initially identified for potential monetisation.
In November 2019, the Cabinet Committee on Economic Affairs accorded approval to the amendments proposed in the TOT model by NHAI. As per the amendments, publicly funded national highway projects that are operational and have a toll revenue generation history of one year after the commercial operation date will be monetised through the TOT model. Besides, the concession period has been allowed to vary between 15 and 30 years, depending on the features of the stretches being offered. However, the monetisation will be subject to approval of the competent authority in the Ministry of Road Transport and Highways or NHAI on a case-to-case basis.
The move will provide the convenience of faster asset recycling, besides mitigating refinancing risks for the concessionaire to some extent. It is also expected to bring some element of certainty as private players will be able to better assess the investment climate for the next 10-15 years vis-à-vis 30 years. Besides, smaller TOT concessions will allow more Indian and medium-sized international firms to bid for such projects. Overall, the amendments are expected to ensure a wider set of assets for monetisation and provide a more attractive model for investors.
The experience so far
After the Union cabinet authorised the monetisation of national highway projects through the TOT model, bids for the first bundle were invited in October 2017. Bundle I comprised nine highway stretches spanning about 683 km in Andhra Pradesh and Gujarat. The bundle was highly successful in drawing private sector interest, with a total of four bids being received from a joint venture (JV) of the Macquarie Group and AshokaBuildcon Limited, Brookfield Asset Management, IRB Infrastructure Developers and a consortium of ROADIS and the National Investment and Infrastructure Fund (NIIF). Bundle I was awarded to the Macquarie-AshokaBuildcon JV in February 2018, with the highest bid quoted being Rs 96.81 billion, which was 1.5 times NHAI’s initial estimated concession value (IECV) of Rs 62.58 billion. The JV achieved financial closure for the bundle in August 2018.
In the same month, NHAI invited bids for TOT Bundle II, comprising eight stretches spanning about 587 km across Rajasthan, Gujarat, Bihar and West Bengal. The bundle elicited a response from three bidders – Cube Highways and Infrastructure Private Limited, Adani Infrastructure and IRB Infrastructure Developers Limited. As against an IECV of Rs 53.62 billion, the highest bid, which came from Cube Highways, stood at Rs 46.12 billion, 14 per cent lower than the IECV. Due to the lacklustre response, the bidding was finally annulled in February 2019 and it was decided to reinvite bids after rebundling.
After the failure of the second TOT bundle, bids for Bundle III were invited in June 2019. This bundle comprises nine highway stretches spanning about 566 km across Uttar Pradesh, Bihar, Jharkhand and Tamil Nadu, of which four stretches are under the annuity agreement. The O&M costs on these stretches will kick in post March 2027, which leaves higher surplus cash flows from the toll collected by the concessionaire for debt servicing. NHAI had to extend the bid submission date for the bundle threee times, on the potential bidders’ request for more time to complete due diligence. Of the 27 bidders who had evinced interest during the pre-bid meetings, bids were received from only three players – Cube Highways, IRB Infrastructure Developers and a JV of NIIF and the L&T Group. Eventually, Cube Highways emerged as the highest bidder for the bundle in November 2019, with a bid offer of Rs 50.11 billion, as against the IECV of Rs 49.95 billion.
However, it has been reported that the sale process for TOT Bundle III has been stuck due to the ongoing COVID-19 pandemic. The deal, which was envisaged to be completed by April 2020, has been held up as the lockdown has ravaged the debt market, thus affecting Cube Highways’ efforts to raise financing for the deal at attractive interest rates. Reportedly, the investor has given intimation of the occurrence of a force majeure event due to COVID-19 and has also suggested that the period for fulfilling the conditions in the concession agreement, including financial closure and payment of concession fees, be extended by the same period as the duration of the force majeure event.
The fourth bundle and beyond
After three rounds of bidding, NHAI launched bids for the fourth TOT bundle in October 2019, with a bid submission due date of February 13, 2020. Initially, Bundle IV comprised seven highway stretches spanning about 401 km across Jammu & Kashmir, Haryana, Punjab, Madhya Pradesh and Maharashtra. However, the authority has recently downsized the bundle by removing the road stretch in Maharashtra owing to legacy issues with the stretch, thus reducing the total size of the bundle to about 342 km and the IECV to Rs 21.65 billion from the earlier Rs 41.7 billion. Besides, the concession period of the bundle has also been reduced to 20 years.
However, with low investor interest, the auction has been postponed five times, with the bid submission deadline now extended till July 31, 2020. Amid the uncertainties on account of the ongoing pandemic and an unprecedented market crash in the past few weeks, interested bidders have been seeking more time for submitting bids for TOT Bundle IV. Meanwhile, as per media reports, investors such as Cube Highways, IRB Infrastructure Developers Limited, PNC Infratech Limited, MEP Infrastructure Developers Private Limited and the Edelweiss Group have been eyeing the fourth bundle.
Besides, the authority also had plans to come up with TOT Bundles V and VI. However, as per reports, NHAI is not planning to invite tenders for the new bundles for the next two months. Bundle V is expected to span a length of about 1,021 km in Gujarat, Rajasthan, Madhya Pradesh and Uttar Pradesh, with an IECV of Rs 72.82 billion. Bundle VI is expected to span a length of about 600 km across Bihar, Jharkhand, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and West Bengal, with an IECV of Rs 41.36 billion.
Fund mobilisation through the asset monetisationprogramme is crucial for NHAI as it is increasingly awarding projects through the engineering, procurement and construction (EPC) route, where under it has to bear all the expenses. The authority has three instruments to raise funds through monetisation of its assets, of which two – the infrastructure investment trust and toll secrutisation – have been untested so far. The third route, the TOT model, has been successfull twice, though there was a failed attempt that had to be aborted. Under Union Budget 2020-21, the finance ministry has claimed that NHAI has plans to monetise at least 12 highway stretches (spanning over 6,000 km) before 2024 to raise additional funds worth up to Rs 600 billion for the smooth implementation of highway projects. However, COVID-19 has hit the plan hard since the authority, which is facing funding constraints amid a prolonged sluggishness in private investments, is struggling to stick to the announced pace of highway awards and construction. The success of the TOT programme is contingent upon the long-term impact of market uncertainties on investor sentiment.