In an attempt at monetising completed stretches of public funded national highways, the Ministry of Road, Transport and Highways (MoRTH) has prepared a roadmap to bid them out to private investors and thereby mobilise additional resources for constructing new highways across the country.
As a step in this direction, the ministry has identified 104 toll roads from where it is currently earning toll revenue. “The government is assessing the interest of the private sector in toll road assets. The objective is to award these toll roads to private sector entities for operations and maintenance for a fixed period in lieu of an upfront fee (under the toll-operate-transfer or TOT model),” said a senior official in the ministry, who did not wish to be identified. A meeting between ministry officials and stakeholders was held at the end of last month on the issue.
Under the TOT model, stretches of national highway already constructed by the NHAI or a concessionaire will be bid out to the private sector. The NHAI can securitise the toll receivables by collecting upfront the concession fee. The private party (infrastructure developers, private equity, institutional investors like pension, wealth funds) will operate and collect toll on the stretch during the concession period.
The ministry has shortlisted close to half a dozen highway projects for illustrating the potential of such investments. These stretches can be good investment prospects for investors on account of other infrastructural developments around these stretches. The Chittorgarh Bypass, for instance, ministry officials say, is an attractive investment opportunity due to the ongoing development of India’s second Nuclear Fuel Complex (NFC) at Rawatbhata town in Chittorgarh district.
The other sections include the Bhadarak-Balasur highway near the Dhamra port where the Adani Group has planned capacity expansion of Rs 7,000 crore in Phase-II; the Hazaribagh-Ranchi stretch where an integrated greenfield steel plant is to be set up by the Steel Authority of India Limited (SAIL); the AP Karnataka border-Devanhalli section where the Devanhalli tech park is under development and is scheduled to be completed by 2020; the Visakhapatnam-Champavati highway near which a logistic park and free trade warehousing zone in being developed in Visakhapatnam.
Manish Agarwal, leader, capital projects and infrastructure, PwC India, said, “There are broadly two benefits of bidding out highway projects on toll, operate, transfer basis. To the extent that there are potential leakages in government toll collection system, entrusting operations to a private sector player will plug gaps and make it transparent. Besides, it will help the government to securitise future cash inflows and utilise it for creating new assets.”
“The TOT model has been designed to create an opportunity for the private sector to invest in low risk assets and at the same time provide for efficient operations and maintenance of highways by the private sector, check pilferage of toll revenue and channelise capital inflows for creating new road infrastructure,” the ministry official said.
As per toll collection data available with the National Highways Authority of India (NHAI), over 40 per cent of toll projects are currently generating more than 10 per cent of the project completion cost annually. Of the total of 104 projects, 44 projects are generating 42 per cent of the project completion cost annually through toll, 34 projects accounting for 33 per cent of the project completion cost annually and 24 projects generating 23 per cent of project completion cost.
The TOT model has already been put to test elsewhere around the world. A consortium of Macquarie-Cintra has invested $1.83 billion in the Chicago Skyway for a concession period of 99 years. Other projects where the model has been implemented successfully include the Puerto Rico Highway PR-22, where a consortium of Goldman Sachs-Abertis has invested $1.43 billion for a period of 40 years, the Penang Bridge in Malaysia where United Engineers Malaysia Berhad has invested $204 million (the concession period has been extended to 45 years from 25 years) and the Indiana Toll Road where a consortium of Macquarie-Cintra has invested $3.8 billion for a period of 75 years.
“We are holding consultations with stakeholders and deliberating on how to define the scope of the concessionaire, what should be the eligibility criteria so as to rope in new investors, the duration of the concession period and who would be responsible for future capacity augmentation,” said the official.
While the concessionaire will be responsible for complete operations and maintenance of the awarded section, the ministry is yet to freeze the list of activities that would form part of the concessionaire’s obligation — toll collection (toll plaza operations, use of technology, safety compliance)/ regular maintenance (prompt repair of potholes, cracks, drains, joints)/ major maintenance (re-laying of the road, strengthening and rehabilitation, refurbishing of the tolling system as and when required).
The ministry is also in the process of determining the eligibility and how to reduce the barrier for new entrants and investors. They are examining whether experience in maintaining and operating toll roads or track record of minimum service levels or use of advanced tolling technologies or experience in major maintenance, experience in road construction should form part of credentials. Discussions have been held to deliberate if debt coverage ratio, debt raising capabilities, debt/equity ratio or experience in past transactions of similar size should be used to determine financial health and capability of the interested party. Debate is also includes duration of the concession period.
“Globally we have seen long term concession period, however, we need to decide what will be appropriate in Indian context — short-term of less than 25 years, mid-term of 25-35 years, long-term of more than 35 years. We have to see if concession period be uniform across all bids,” said another official.
Discussion are also on whether to undertake project by project bid or award a portfolio of projects in a bid, the minimum size of the portfolio in that case and if the portfolio should have contiguous toll roads or geographically spread toll roads. In addition, there needs to be discussion on the proposed termination payment clause.
An important consideration that is also being discussed internally is on the subject of capacity augmentation. As per the broad contours of the TOT model, capacity augmentation should be undertaken once the average traffic in any year exceeds target traffic. Two options are being considered — the augmentation can be taken up by the authority under engineering, procurement and construction (EPC) contract and additional revenue post augmentation can be shared in fixed proportion between concessionaire and authority. Alternately, the concessionaire can take up the augmentation in which case, land acquisition and approvals will be done by the authority. The concession period can be extended to account for the fresh investment. Operations and maintenance of the augmented road, however, lies with the concessionaire in both the options
A big push in the roads sector is key to the NDA government’s infrastructure focus, wherein it has drawn up an ambitious target to award highway projects worth Rs 3.5 lakh crore. As many as 1,231 projects measuring 37,000 km have been firmed up for award by the ministry over the next two years.
The government has given its nod to the Bharat Mala project aimed at developing 6,000 km of new roads in border areas at an estimated cost of Rs 76,000 crore. Another 2,500 km of roads to connect religious and tourism centres in mountainous terrain is expected to come up at an estimated cost of Rs 51,000 crore. Also, world-class highways will be developed to connect 123 of the 676 district headquarters in the country at an estimated cost of Rs 96,000 crore.
The government has allocated Rs 42,913 crore for the highways sector in the Budget for the current fiscal, up from Rs 28,881 crore in 2014-15, to ensure greater participation in road building in absence of private investment. But with mega projects in the pipeline, the government has also been exploring different terms of engagement to lure in the private sector in investing in road projects.