Monetisation of public-funded 75 highway projects through the TOT model, aimed at mobilising funds for highway construction by transferring these operational projects on a long-term lease basis to domestic and foreign “patient capital” investors was approved by the committee on economic affairs in 2016. Crisil estimated the NHAI could raise about Rs 60,000 crore over the next two-three years by monetising these 75 highway stretches.
Australian firm Macquarie had bagged the first tranche of nine highway projects, totalling 680 km, in March this year, putting in a Rs 9,681.5-crore bid that exceeded NHAI’s initial estimated value of Rs 6,258 crore. The NHAI had in October last year had put in these nine projects on the block for giving on a 30-year lease under the TOT model.
Of the eight projects, proposed to be leased out in the second tranche, three are three different sections of the NH-27, four are four different sections of NH 31 and the remaining is one section of NH 115.
“Looking at the favourable response from the first tranche, we are hopeful of getting a better response from both domestic and foreign firms in the second round,” NHAI’s member-finance Asheesh Sharma told FE. Investors such as Macquire, Brookfield, Roadis Transportation Holding, NIIF and IRB Infrastructure had put in bids in the first round.
Under the TOT model, successful bidders are required to pay the amount upfront. The NHAI uses the upfront receivables exclusively for funding construction of highways. Bidders will recoup their investments ? and returns ? by collecting toll over the lease tenure. These projects have been built by the government under the conventional engineering, procurement and construction model. Tolls are currently being collected by the NHAI.
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 16-18% generated in build-operate-transfer projects where risks are also higher. But that is still considered good returns by owners of ‘patient capital’ such as sovereign wealth, pension and insurance funds.
Asset recycling of this kind is going to be tested for the first time in India, although internationally there have been many precedents. The US, for example, did it during the Subprime Mortgage Crisis of 2008 to bolster cash flows to the exchequer. The practice is also prevalent in Australia.