In August 2016, the Cabinet Committee on Economic Affairs (CCEA) had authorised the NHAI to monetise public funded National Highway (NH) projects, which are operational and are generating toll revenues for at least two years after the Commercial Operations Date (COD) through the Toll-Operate-Transfer (TOT) model. Seventy-five operational national highway projects totaling 4,376 km completed under public funding have been preliminarily identified for potential monetisation, using the TOT model. For these 75 projects, the median vintage in terms of toll collection track record stood at 5.22 years. Out of these, nearly 26 projects (35 per cent of total) are on BOT (Annuity) basis and the remaining 65 per cent have been implemented on engineering, procurement and construction (EPC) basis. Of the portfolio, 25 projects (33 per cent) are part of the Golden Quadrilateral (GQ) with high traffic density, where the average toll collection per day is at Rs 1.6 million, whereas for the non-GQ stretches it is Rs 0.7 million per day.
According to K Ravichandran, Senior Vice President and Head-Corporate Ratings, ICRA, “Given the wide variation in toll collections, the attractiveness of certain stretches with long vintage and established traffic volumes – especially the ones along the GQ – is much more when compared to the ones with less operational track record and weak toll collections. In this context, it makes sense to bundle the projects so that weaker projects are not left out and NHAI could also consider keeping floor and cap so that the bidding is not very aggressive in case of attractive stretches. Geographically diversified stretches are good for the NHAI so that weak and strong projects can be bundled. However, from the developer’s perspective, they will be more interested in contiguous stretches, given the operational synergies or scale benefits.”
According to ICRA Research’s estimates, the total value of 75 projects proposed to be awarded through the TOT is estimated at Rs 356 billion. Assuming the average cost to the NHAI is Rs 0.13 billion per km (for a four-lane project), the proceeds from monetisation through the TOT route can be used towards road construction of around 2,700 km.
On key challenges in the TOT model from the bidder’s perspective, Shubham Jain, Vice President, ICRA, says, “Given that the concession period for the TOT projects is expected to be 30 years, with permissible debt up to 80 per cent of the concession fee, in the absence of longer tenure debt (beyond 15 years currently), it could be difficult to avail of a debt equivalent to 80 per cent of the concession fee or alternately projects with such high debt levels would require refinancing at a later stage. Moreover, the TOT concessionaires will remain exposed to the traffic risk; however, availability of past traffic data will help in better forecasting. Another area of major concern for the bidders will be the quality of the assets – for many EPC projects which are irregularly maintained in the past, the major maintenance requirement could be higher than the benchmarks once the TOT concessionaire takes over the project.”
As regards the ongoing projects, the Ministry of Road Transport and Highways (MoRTH) planned to increase both the awards and the execution in FY2017 by 2.5 times from that of the FY2016 levels. For the NHAI, the targets are steep with a target execution of 8,000 km (at 21.92 km per day) and target awards at 15,000 km. Given that the execution during FY2016 was at around 5.44 km per day, the target for FY2017, at 21.92 km per day, is almost four times higher. ICRA in its research report dated May, 2016 opined that the target looks ambitious and is difficult to achieve. During 8MFY2017, 41 projects totaling 2,598 km were awarded. NHAI now intends to award a total of 6,615 km in FY2017, which is 44 per cent of target awards. Although the pace of execution increased by 17 per cent during 8MFY2017 to 5.82 km per day from 4.96 km per day, during 8MFY2016; it is just 27 per cent of target execution of 21.92 km per day. Therefore, in terms of both award and execution, the NHAI is expected to miss the target by a wide margin. Nonetheless, the road sector has witnessed resurgence in recent quarters due to several policy initiatives, which is a credit positive.