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Toll Operate & Transfer: Model, Draft Concession Agreement

July 13, 2019
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This article is written by Pankaj Agarwal, Partner at Shardul Amarchand Mangaldas & Co. and Kunal Sharma, Senior associate at Shardul Amarchand Mangaldas & Co., here the authors have discussed on Toll operate & transfer Model of NHAI.

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 are required by India till 2040 to develop infrastructure to improve economic growth and community well-being, 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.

Toll Operate & Transfer 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 the concession period. CCEA expects that the 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. 

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TOT Draft Concession Agreement – Key provisions

The Draft Concession Agreement (Tolling, Operation, Maintenance & Transfer of Highway) on TOT, covers various aspects of the project. Some of the key provisions of the said draft are discussed below:

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.

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 the industry so far, in the form of the 2018 bid won by Macquarie Group for INR 9,681 crore, 1.5 times of NHAI’s (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 clauses of Concession Agreement, and have instead participated enthusiastically in TOT project bundles.

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