A TOT for the road: Highway monetisation plan under PPP finally takes off

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Last week, the joint venture between Macquarie and Ashoka Buildcon emerged as the highest bidder for the Union government’s first batch of nine Toll-Operate-Transfer (TOT) projects worth Rs 96.8 billion.

This marks the start of a new journey under the rubric of public-private partnership for road construction, six years after the idea of tendering long-term operation and maintenance contracts to investors was conceived in 2013. Modelled on the concessions of a similar nature across the US, Europe and Australia, TOT offers the National Highways Authority of India (NHAI) a handy mechanism for raising funds for financing future infrastructure projects in ways that are more cost-effective and marginally less contentious than the short-lived attempt at viability gap funding.

The first milestone down this new financing route came in August 2016 when the Cabinet Committee on Economic Affairs authorised NHAI to monetise national highway projects that are operational and generating toll revenues for at least two years after the commercial operations date through the TOT model.

How does the TOT model work and how does it help? Under the TOT model, the concessionaire pays a one-time concession fee upfront (as a lump sum), which then enables the concessionaire to operate and toll the project stretch for a pre-determined 30-year period.  

In 2013, it was viewed largely as a way of surmounting the roadblocks to funding highway projects at the time. “A lot of highway projects around that time were going to the finance ministry for appraisal and every time several questions were raised regarding the funding of the projects,” former Road Secretary Vijay Chhibber recalls.

The source of funding a highway essentihally was the Central Road Fund (CRF) and toll collection, while the direct budgetary support for such projects was negligible.

At the same time, the quality of roads was deteriorating and a sizeable portion of funds was being spent towards their repair and maintenance.

It was then that a team of officials in the ministry of road transport came up with the idea of road monetisation contracts, after several rounds of brainstorming with the consultants over the financial viability and feasibility of these contracts. The TOT model is expected to reduce the Union government's funding requirement for future projects. The idea is to utilise an innovative model to help the government raise funds and save on cost of operation and maintenance.

A kitty of 170-odd projects was prepared for the proposed monetisation drive; at the time they were being tolled under short-term contracts.

If excessive finance ministry scrutiny encouraged the government to explore alternative funding options for road projects, the road ministry and NHAI monitoring mechanism for these projects would warrant tighter scrutiny.

Enticing the best international private equity players to invest in the country’s infrastructure sector through this untested model, needed a thorough due diligence. For this, as many as 11 workshops with stakeholders were held till 2015 to prepare the granular details of the contracts – issues such as whether the projects would be bundled state-wise or length-wise were decided only at the end of the seventh workshop.

An official requesting anonymity said convincing Union road minister Nitin Gadkari to tender the projects through the relatively transparent process of international competitive bidding was another challenge; he preferred to sell these contracts through negotiations.

To come up with the base price for the contracts, a back-of-the-envelope calculation was made and the cost incurred in the construction of a particular road was kept as the floor price of the project when the bids were invited. Some experts believe that the contracts were tailor-made to woo international pension funds from Canada and UAE. “The long term pension funds did not want to take the construction risk while investing in the Indian infrastructure space, but were interested in the traffic potential of those projects,” said Abhay Agarwal, partner, infrastructure & PPP, at EY.

Miles to go

  • First bundle of nine projects consists of five highways in Andhra Pradesh and four in Gujarat
  • Four bids were received for the first bundle — from Brookfield Asset Management, Macquarie-Ashoka Buildcon, IRB Infrastructure, and Roadis-NIIF
  • Total value of the first bundle of projects is Rs 96.8 billion
  • Macquarie-Ashoka Buildcon bid was 1.5 times higher than the base price of Rs 62.6 billion
  • 75 operational highway projects have been identified for monetisation via the TOT model

After several rounds of consultations with the prospective bidders, the NHAI decided to bunch eight or nine projects of approximately $250 million to make them financial viable for the pension funds. “Bidders had shown a reluctance to take up smaller contracts, so the government took its time to assess the value of the contracts in order to get higher bids,” Chibber said.

The idea mooted nearly half a decade ago took so many years to fructify principally on account of the tedious project selection process, estimating advance traffic for several years on the selected stretches of roads and so on.
According to Shubham Jain, vice-president and sector head-corporate ratings, ICRA Ltd, “The first set of TOT offering saw robust results in terms of the winning bid being significantly higher than the NHAI’s expectation. Going by this, government’s plan of raising  Rs 340 billion from TOT looks well within reach.”

The Macquarie-Ashoka Buildcon joint venture bagged the first batch of TOT projects at 1.5 times higher than the base price of Rs 62.6 billion.

Ashoka Buildcon would be responsible for the operation and maintenance and Macquarie Asia Infrastructure Fund-II will bring in the equity.

Three other bids were received for the first bundle — from Brookfield Asset Management, IRB Infrastructure, and Roadis-NIIF.

With the first round complete, the momentum has been set. “Going forward, the government and NHAI should prepare at least six months in advance before tendering the next batch of projects as better advance planning would take them a long way in receiving higher bids for the contracts,” an expert said.