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 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.
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:
Grant of Concession
Concession will be for a period of 30 years from ‘Appointed Date’, which shall not be reduced by more than 5 years or increased by more than 10 years.
Applicable only if the obligations of concessionaire are financed by Banks/ FIs.
Change In Ownership
All acquisitions of equity by an acquirer, either by himself or with any person acting in concert, either directly or indirectly (including by transfer of legal or beneficial ownership or control of any equity), in aggregate of not less than 25% of the total equity of concessionaire; or acquisition of any control directly or indirectly of the board of concessionaire by any person either by himself or together with any person or persons acting in concert with him – shall require prior approval of Authority from national security and public interest perspective.
Authority is restricted from constructing competing roads, but such restriction is not applicable, if average traffic on the project highway in any three consecutive years exceeds 90% of its designed capacity. Upon breach of this obligation Authority: (i) will be restricted from constructing additional tollway; (ii) will be liable to pay compensation to concessionaire due to variation in toll collection; and (iii) will be obliged to comply with minimum fee on vehicles using additional tollway to be at no time be “less than 25% higher than the Fee levied and collected from similar vehicles using the Project Highway”.
Authority may (upon concessionaire’s request) permit and enable concessionaire to secure refinancing, in whole or in part, of Debt due, to be utilized for the project purpose only.
Authority shall bear one-half of the remuneration, cost and expenses of the independent engineer.
In consideration of the grant of concession of project highway, concessionaire shall pay lump sum upfront concession fee (per selected bidder’s quote in its financial bid) to Authority, and same shall be paid prior to ‘Appointed Date’.
Intelligent Tolling System
Upon introduction of intelligent tolling system (closed tolling) or equivalent mechanism by Authority, concessionaire shall be encouraged to switch over to the same. In the event of any substantial variation in the revenue collection due to switching over to such system or mechanism, Authority shall settle the same with concessionaire in terms of the agreement.
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.
Withdrawals during Concession Period
Concessionaire shall not modify the order of payment specified in the agreement, except with prior written approval of Authority and lenders to concessionaire.
Extension of Concession Period
If Authority commits material default or breach, leading to suspension of, or reduction (i.e. less than 90% of ‘Average Daily Fee’) in collection of, ‘Fee’, then Authority shall extend concession period, which would be equal in: (i) duration to the period of such suspension; or (ii) proportion to loss of Fee on a daily basis (in case of reduction).
In the event of Authority terminating the agreement on account of default by concessionaire, in addition to Authority forfeiting the performance security, Authority shall pay to concessionaire 70% of the ‘Unexpired Cash Flow’. Upon termination due to default by Authority, it shall pay to concessionaire, an amount equal to 105% of the Unexpired Cash Flow as Termination Payment, subject to no objection certificate (NOC) issued by lenders/ lenders’ representative recording release of charge on project receivables (if any), failing which Authority shall be procured NoC by paying ‘Termination Payment’ directly to ‘Lenders/Lenders Representative’.
Change in Law
If a ‘Change in Law’ causes concessionaire to suffer: (i) increase in costs or (ii) reduction in net after-tax return or (iii) other financial burden, then concessionaire may notify Authority, and parties may amend the agreement to neutralize the effect thereof. Similar would be the case for Authority.
Disputes shall be referred 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 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.