The toll-operate-transfer model for asset recycling

By Nilesh Chandra and Abhinav Mishra, HSA Advocates

India has a gigantic capacity for public-private partnership (PPP) investments. While PPP project implementation grew aggressively from 2001 to 2010, project awards dropped sharply between 1 April 2014 and 31 March 2015. This can be attributed to a lack of optimal and equitable allocation of risks between the stakeholders, cumbersome process and legislative uncertainty in land acquisition, lack of regulatory certainty regarding environmental/industrial consents and clearances, absence of a PPP regulator, instances of long-drawn litigation and unstable revenue models.

Nilesh Chandra Partner HSA Advocates
Nilesh Chandra
HSA Advocates

In November 2015, a report by the Committee on Revisiting and Revitalizing Public Private Partnership Model of Infrastructure recommended monetizing operational projects with a formidable record of revenue generation, which can then be doled out to private parties for operation and maintenance (O&M).

Finance Minister Arun Jaitley, in his budget speech for 2016-17, stressed the need for asset recycling, describing it as a process whereby the government, without transferring its ownership in operational assets such as roads, ports and airports, will allow private parties to undertake long term O&M obligations on payment of a lump-sum concession fee.

In light of the existing infrastructure deficit in India, along with the challenges being faced in the development of greenfield projects, before asset recycling can be implemented in full swing, it is imperative to analyse its viability and to determine the key considerations which must be factored in.

In November 2016, the National Highways Authority of India, under the aegis of the Ministry of Road Transport and Highways, initiated the implementation of asset recycling in India, with 75 operational road projects being bid out under the toll-operate-transfer (TOT) model. Under this model, highway projects which have been operational for at least two years, and which have been generating a steady stream of revenue, are to be leased out to large-cap investors for carrying out O&M operations in consideration of the highest bid upfront concession fee.

While the operate-manage-transfer (OMT) model has been used in the past in India, the concession period under this model is only six to nine years, which stands in stark contrast to the TOT model, where a concession period of 25 to 30 years is contemplated. Another marked difference between the OMT and TOT models is the lack of upfront lump-sum concession fee payment by the private investor.

Before asset recycling in the highway sector can be implemented in full swing, the government will need to determine cogent criteria to (i) identify viable projects and (ii) assess the true value of such assets. It would be ideal for the government to start out by early identification of assets most conducive of being recycled so as to set a reliable precedent for the model.

Abhinav Mishra Associate HSA Advocates
Abhinav Mishra
HSA Advocates

Further, while formalizing and developing a regulatory/legal framework including model documents, it would be imperative for the success of TOT that the framework include: (i) rigorous criteria for identification of eligible bidders having extensive experience in O&M of highways; (ii) state-of-the-art tolling technologies such as e-tolling/radio frequency identification, and a project-specific mechanism for determination of concession period based on minimum lump-sum concession fee; (iii) revenue projections based on traffic growth; (iv) investor-friendly traffic-related risk sharing mechanisms (considering the long concession period); (v) bundling of multiple projects to attract large-cap players with the ability to secure long-terms debts; and (vi) integrated provisioning vis-à-vis capacity augmentation of the project on reaching the design capacity within the concession period.

One of the significant issues being deliberated on by stakeholders is the proposed concession period of 25 to 30 years, which is the maximum concession period for PPP projects in India as against the global standard of up to 99 years.

Though the proposed model is yet to be practically introduced to India, it has been successfully implemented elsewhere, with notable projects including the Chicago Skyway, the Indiana Toll Road, Puerto Rico Highway PR-22 and the Penang Bridge.

The broad incentive of asset recycling via the TOT model, for private investors, is that while their participation involves entering into a long-term concession, with a manifestly decreased scope of risk adoption it is insulated from the supposedly unstable regulatory environment in India. For the government, this will allow leveraging cash inflow for development of greenfield highway projects as well as ensuring well-managed, pilferage-free and safety-compliant existing highways.

Nilesh Chandra is an associate partner and Abhinav Mishra is an associate at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai, Bengaluru and Kolkata.


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