Evolving Strategies: Progress and potential of NHAI’s TOT programme

Progress and potential of NHAI’s TOT programme

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 the construction of new highways. Asset recycling has the advantage of low construction risks for the concessionaire. It also helps the asset controlling infrastructure authority to meet its capital requirements for other priority developments and plugs the gap in operational efficiency by bringing in international standards in the operation and maintenance (O&M) of existing assets. However, the Covid-19 pandemic has impacted the TOT programme adversely and altered the government’s approach to asset monetisation.

The experience so far

The TOT model was introduced in 2016 with the aim of monetising publicly funded highways. Investors could make a one-time lump-sum payment for the asset in return for toll collection rights for a stipulated period of time. On August 3, 2016, the Union Cabinet authorised the National Highways Authority of India (NHAI) to monetise publicly funded, operational national highway projects that had been generating toll revenues for at least two years after the commercial operation date (COD). Initially, 75 highways were identified for monetisation through the TOT model.

Bids were invited for the first TOT bundle in October 2017. This bundle comprised nine highway stretches spanning about 683 km across Andhra Pradesh and Gujarat and was remarkably successful in drawing private sector interest. A total of four bids were received – from a joint venture (JV) of the Macquarie Group and AshokaBuildcon Limited, Brookfield Asset Management, IRB Infrastructure Developers Limited and a consortium of ROADIS and the National Investment and Infrastructure Fund (NIIF). In February 2018, Bundle I was awarded to the Macquarie-AshokaBuildcon JV, with the highest bid quoted being Rs 96.81 billion, which was 1.5 times NHAIPs 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, namely, 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 for the bundle, bidding was finally annulled in February 2019 and it was decided that the bids would be reinvited after re-bundling.

After the unsuccessful bidding for the second bundle, bids for TOT 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 these, four stretches are under an annuity agreement. NHAI had to extend the bid submission date for the bundle three times, as the potential bidders wanted more time to complete their due diligence. Of the 27 bidders who had evinced interest during pre-bid meetings, bids were received from only three players – Cube Highways, IRB Infrastructure Developers and a JV of NIIF and the Larsen & Toubro Group. In November 2019, Cube Highways emerged as the highest bidder for the bundle, with a bid offer of Rs 50.11 billion, as against the IECV of Rs 49.95 billion. Monetisation of TOT Bundle III, which was expected to conclude by April 2020, was delayed since Cube Highways could not close the Rs 35 billion financing deal with the State Bank of India until September 2020 as a result of the Covid-induced traffic uncertainty. Finally, NHAI received the bid amount of Rs 50.11 billion from Cube Highways in October 2020, to close the bundle sale.

Modifications to the TOT model

In order to make the TOT model attractive to all investor classes, NHAI has made various changes to it. In November 2019, the Cabinet Committee on Economic Affairs accorded approval to the amendments in the TOT model proposed 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 COD can be monetised through the TOT model. Besides, the concession period can now vary from 15 years to 30 years, depending on the features of the stretches being offered. However, the monetisation will be subject to approval by the competent authority in the Ministry of Road Transport and Highways or NHAI on a case-to-case basis. The flexibility in the concession period will provide the convenience of faster asset recycling, besides mitigating refinancing risks for the concessionaire to some extent. The change in the concession period is also expected to bring in an element of certainty as private players are better able to assess the investment climate for the next 10-15 years vis-à-vis 30 years.

NHAI launched bids for the fourth TOT bundle in October 2019, with an initial bid submission due date of February 13, 2020. To begin with, Bundle IV comprised seven highway stretches spanning about 401 km across Jammu & Kashmir, Haryana, Punjab, Madhya Pradesh and Maharashtra. However, the authority subsequently downsized the bundle by removing the road stretch in Maharashtra owing to legacy issues, thus reducing the total size of the bundle to 342 km and the IECV to Rs 21.65 billion from the initial Rs 41.7 billion. The concession period of the bundle was also reduced to 20 years. However, due to low investor interest amid the Covid-19 pandemic, bid submission due dates for the fourth bundle had to be extended multiple times, before NHAI finally decided to withdraw the bundle in September 2020.

Meanwhile, based on recommendations from a number of investors, NHAI has decided to disclose the IECV of subsequent TOT bundles only after receipt of technical bids and after declaring the selected bidder. The decision has been taken to allow investors to bid for the projects freely at a time of uncertainties regarding road traffic on different stretches under the new TOT bundles. NHAI has decided to tune the TOT Bundle IV to this policy change before releasing it for bidding once again.

Besides, the authority recently put TOT Bundle V on the block, without disclosing its IECV. The new bundle is the smallest-ever tender for asset monetisation, consisting of only two national highway stretches in Gujarat with a total length of 159.5 km. Bundle V has been further divided into Bundle 5 (A-1) and Bundle 5 (A-2), each with a concession period of 20 years. The last date for bid submission for both the bundles has been set at December 23, 2020.

The way forward

In Union Budget 2020-21, the finance ministry announced that NHAI would monetise at least 12 highway stretches spanning over 6,000 km before 2024 to raise uptoRs 600 billion for the smooth implementation of new highway projects.

However, the monetisation plan has been hit hard by the Covid-19 pandemic, which has severely impacted the medium- to long-term viability of projects. Traffic studies will now have to be revisited to take the pandemic into account. Further, the impact on GDP is still uncertain, as a result of which market interest for the upcoming TOT bundles is hard to ascertain. Investor interest in the TOT model is thus expected to be limited for some time. Low rates of tolling could also impact the valuation of TOT projects. Therefore, a complete structural assessment is required to understand the viability of the projects and make the upcoming bundles attractive to investors in these uncertain times. The national highway stretches included in the TOT bundles need to be chosen after greater due diligence to ease operational difficulties.

Going forward, the success of the TOT model will continue to be contingent upon the long-term impact of market uncertainties on investment sentiment.