India: Toll Operate & Transfer Model

Last Updated: 2 August 2019
Article by Pankaj Agarwal and Kunal Sharma

The Need

The Global Infrastructure Outlook reflects that rising income levels and economic prosperity is likely to further drive demand for infrastructure investment in India over the next 25 years. Around US$ 4.5 trillion worth of investments is required by India till 2040 to develop infrastructure to improve economic growth and community wellbeing, and there is no doubt that roads and highways are the top priority items in India's infrastructure development. Roads and Highway projects are priority areas in infrastructure development.

TOT Model

In 2016, the Cabinet Committee on Economic Affairs (CCEA) authorised NHAI to monetise public funded national highway (NH) projects, and approved the Toll Operate and Transfer (TOT) model. Under this model, public funded projects, operational for two years, would be put up for bidding, wherein the right of collection and appropriation of fee would be assigned for a predetermined concession period (30 years) to concessionaires (developers/ investors) against upfront payment of a lump sum amount to NHAI. Accordingly, 75 operational NH projects completed under public funding were identified. O&M obligation of such projects would be with concessionaire till the completion of concession period. CCEA expects that TOT model would: (i) provide an efficient operation and maintenance (O&M) framework which would reduce NHAI involvement in projects post construction completion; (ii) help in utilization of the corpus (generated from proceeds of such project monetisation) by the government to meet fund requirements for future development and O&M of highways in the country, including in unviable geographies; (iii) facilitate efficient toll realization through private sector; (iv) create new business opportunities for a new vertical of developers who specialize in O&M, and encourage certain category of investors (Institutional Investors, including Pension & Insurance Funds, Sovereign Funds, etc.) who are disinclined to take construction risks but are equipped for making long term investments.

Bundles/ Phases of TOT Projects

First bundle of TOT projects comprising of nine projects, totalling 681 km of roads in Andhra Pradesh and Gujarat, were awarded in 2018 to Macquarie Group (Australia based infrastructure asset management company) for INR 9,681 crore, which was 1.5 times of NHAI's estimate. Second bundle comprising of eight NH stretches on TOT model was annulled by NHAI. On June 13, 2019, NHAI issued tender (inviting bids from private operators) for third TOT bundle, comprising of nine NH stretches aggregating to 566.27 kms, and having Initial Estimated Concession Value of Authority of INR 4,995.48 crore. This third bundle comprises of projects, namely, Jhansi-Lalitpur (package-1: section of NH 25 & 26) and (package-2: section of NH 26), Lucknow-Raibareli (section of NH 24B) in Uttar Pradesh; Kotwa- Muzaffarpur (section of NH 28) in Bihar; Hazaribagh-Ranchi (including Ramgarh bypass section of NH 33) in Jharkhand; and three stretches on Madurai to Kanyakumari (section of NH 7) in Tamil Nadu.

Highlights of TOT Model

  • Though the period of concession is 30 years from 'Appointed Date', this period may be varied (i.e. increased or decreased) depending on certain situations that may arise as the project commences.
  • Upon grant of concession of the project, concessionaire is required to pay lump sum upfront concession fee to Authority, prior to 'Appointed Date'. Further, escrow account is required only if concessionaire obtains loans/ advances from Banks/ FIs. 
  • Since the government expect foreign players to be interest in TOT projects, it has introduced requirement of prior approval from Authority (from national security and public interest perspective), in all cases of acquisitions (including transfer of ownership or control) of not less than 25% of the total equity of concessionaire; or acquisition of any control of the board of concessionaire.
  • Issue of competing roads is a serious and recurring point of dispute for numerous projects in India, as such, Authority is restricted from constructing competing roads under TOT model, subject to certain conditions. Further, TOT model also prescribes for penalties in case Authority breaches its obligations in this regard.
  • Concessionaires are permitted by Authority to secure refinance in whole or in part of the Debt Due subject to the same being utilized for the project purpose only.
  • Under TOT model, with the aim to encourage the concessionaire, Authority will bear one-half of remuneration, cost and expenses of the Independent Engineer.
  • TOT model also provides flexibility to concessionaire to upgrade to 'intelligent tolling system' or equivalent mechanism, upon the same being introduced in future, coupled with the benefit of settlement of revenue collection with Authority in case of substantial variations.
  • NHAI proposes to adopt a tolling system, which will work on a combination of mobile telecommunications technology (GSM) and satellite-based GPS, and would be able to deduct money from a vehicle account, credit to concessionaire within one day and open toll gate. In case of a failed transaction it would be able to alert toll operator to collect payment manually and not open the gate.
  • As a safeguard to the lenders, besides procuring permission from Authority, the concessionaire is also required to take permission from its lenders for modification in order of payment specified under the TOT model.
  • TOT model aims to reduce dispute for extension of concession period by providing extension upon material default or breach committed by Authority, leading to suspension of, or reduction (i.e. less than 90% of 'Average Daily Fee') in collection of, 'Fee', as provided in the TOT model.
  • It is also provided that: (i) upon termination of the arrangement due to default by concessionaire, the Authority shall forfeit performance security, but pay 70% of 'Unexpired Cash Flow' to concessionaire.; and (ii) upon termination due to default by Authority, concessionaire shall be paid an amount equal to 105% of the Unexpired Cash Flow, subject to lenders (if any) issuing NOC, failing this such payment shall be made by Authority directly to such lenders.
  • TOT model provides flexibility to Parties to neutralize effect of any: (i) increase in costs or (ii) reduction in net after-tax return or (iii) other financial burden, suffered by either of the Parties due to 'Change of Law'.
  • To reduce the allegation/ probability of biasness in settlement of disputes, arising between Parties, TOT model provides for reference thereof to Society for Affordable Redressal of Disputes (SAROD) for arbitration, which was incorporated in 2013, by NHAI, and National Highways Builders Federation (NHBF), an apex organization of all contractors/ builders of NHs, state highways and bridges in India.

The way ahead is challenging in infrastructure space for India, including road projects. However, given the impetus in form of TOT model, and the response from industry so far, in the form of the 2018 bid won by Macquarie Group for INR 9,681 crore, 1.5 times (as discussed earlier), this seems to bring a new dimension for facing and solving such challenges. It is interesting to note that foreign investors are not discouraged with the provisions of the TOT model clauses, and have instead participated enthusiastically in TOT project bundles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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