India’s government-run road builder will soon invite bids for long-term leases to manage a dozen stretches of national highways as it eyes foreign institutional investors for funds to improve the country’s road network.
The National Highways Authority of India is expected to initiate the bidding process in May for 10-15 operational highways of the 75 selected under the new Toll-Operate-Transfer (TOT) model, a senior NHAI official told BloombergQuint on the condition of anonymity. The model offers 30-year contracts to operate and maintain highways on a one-time upfront payment.
GVK Power and Infrastructure Ltd. will consider bidding in the auction, said the company which built airports in Mumbai and Hyderabad and operates the Jaipur-Kishangarh highway in Rajasthan. Since the asset will not be carried in a company’s books, the model will be preferred, said Isaac George, company’s director and chief financial officer.
India’s highway construction has failed to meet targets amid lack of funds and delays in land acquisition and environmental clearances. A recent report by ratings agency CRISIL Ltd. estimates that over the next two financial years, highways would require investments of Rs 2.2 lakh crore, more than twice the previous two financial years, as execution of publicly funded projects improves.
Luring Foreign Institutions
Canadian Pension Plan Investment Board, Macquarie Group and other institutional investors from Europe and Asia, who are equipped to make long-term investments of at least $250 million, have shown interest, said the NHAI official quoted earlier.
An email by BloombergQuint to NHAI seeking details did not elicit any response.
The CRISIL report estimates that the 75 highways could fetch up to Rs 40,000 crore, lower than Rs 50,000-80,000 crore the government expected. The TOT model can fetch an annual toll revenue growth of 7-8 percent and return on equity of 14-16 percent, it said. This may not be aggressive but road operators are positive, Ajay Srinivasan, director at CRISIL and one of the authors of the report, told BloombergQuint over the phone.
“TOT is an asset-light model. We would definitely like to participate in it once the bids open,” said a spokesperson for MEP Infrastructure Pvt., which is the toll operator for five entry points to Mumbai and also manages the Hyderabad-Bengaluru national highway. The model would allow the company to work on a longer tenure, which is always a better option, the spokesperson said.
TOT Vs OMT
In the Toll-Operate-Transfer model, a private player is expected to operate and maintain the highway and collect toll for 30 years after making an upfront payment, without having to build the highway. The funds generated would be spent on other road projects.
“Bidding through special purpose vehicles set up by infrastructure investment trusts (InvITs) or transferring TOT projects to InvITs after two years would also aid better management of risks,” said Srinivasan.
The Cabinet Committee on Economic Affairs had in August last year authorised the NHAI to monetise around 75 national highways which are operational and generating revenues for at least two years.
The government preferred TOT over the existing Operate-Maintain-Transfer (OMT) model, which requires the selected road operator to manage the project for six to nine years. The OMT model was not successful because there was a fixed annual increase in payments to NHAI irrespective of traffic, the CRISIL report said. The shorter tenure led to poor maintenance, it said.
The government hopes the TOT model would facilitate efficient toll realisation through the private sector. It would result in better maintenance of assets, said the NHAI official cited earlier. Paul Hornung Womens Jersey