Even as it had to abort the second round of auction under the toll-operate-transfer (TOT) model due to lack of investor interest, the National Highways Authority of India (NHAI) is not going slow on its plan to monetise its operational projects. According to official sources, the authority, which is in need of funds to repay debt and build new highways, will soon invite requests for proposal (RFPs) for two TOT tranches, measuring a total of 970 km, hoping to garner at least Rs 9,000 crore through this model in FY20.
Under the TOT model, publicly funded operational highway projects are given on long-term lease basis to domestic and foreign “patient capital” investors. Successful bidders are required to pay the lease amount upfront and can recoup their investments · and returns · by collecting toll over the lease tenure of 30 years.
Of the two projects to be bid out under TOT now, one is a basket of nine highway projects totalling 566 km spread across Uttar Prdesh, Gujarat, Andhra Pradesh and Jharkhand. The RFP for this, the sources said, will be issued within a week. Tender for another asset comprising eight highway stretches spanning 404 km is expected to be issued in a month.
NHAI has set the floor price at Rs 4,995 crore for the 566-km bundle and Rs 4,056 crore for the 404-km basket. Both these stretches are proposed to be handed over to the highest bidder by early next year. These projects have been built by the government under the conventional engineering, procurement and construction model. Tolls are currently being collected by NHAI.
The Cabinet Committee on Economic Affairs had in 2016 allowed NHAI to monetise 75 highway projects through the TOT model. Crisil had earlier estimated that NHAI can raise about Rs 60,000 crore through monetisation of these highway stretches.
For the first time in October 2017, NHAI had invited bids for such public-funded highway projects. In the first tranche, nine highway projects were offered and Australia-based Macquarie bagged them quoting Rs 9,681.5 crore for the total length of 680.5 km against the floor price of Rs 6,258 crore. NHAI’s second TOT attempt, however, failed. Against its floor price of Rs 5,632 crore from eight highway projects with a total length of 586.55 km, the highest bidder (Cube Highways) quoted only Rs 4,612 crore, forcing the authority to abandon the plan. Asset recycling of this kind is being tested in India, following many global precedents.
The US, for example, did it during the subprime crisis of 2008 to bolster the cash flows to the exchequer; the practice is also prevalent in Australia. As per Crisil, these projects have limited implementation risk and largely stable cash flows, they are expected to offer a 12-13% internal rate of return, which is lower compared with the 16-18% generated in BOT projects where the risks are also higher. But that is still considered good returns by owners of ‘patient capital’ such as sovereign wealth, pension and insurance funds.