Will auction of public funded highways work?
New Delhi: With the Union cabinet’s clearance to monetize public funded national highways in the country on Toll Operate Transfer (TOT) model, the road transport and highway ministry is expecting the sector to revitalize.
Under this arrangement, the National Highway Authority of India (NHAI) is now authorized to lease as many as 75 National Highway projects, which are operational and have been generating toll revenues for at least two years to various entities on TOT model. The decision has come as the NHAI’s present model of Operation Maintenance and Transfer (OMT) has been partially successful.
A highway ministry official requesting anonymity said in the traditional public funded NH projects once the project is completed and the contractor exits, the entire responsibility of regular and periodic maintenance and day-to-day operations including toll collection comes on to the NHAI and they usually outsource it to various vendors and contractors.
However, the market feedback, which the NHAI and highways ministry has got, indicates that there are a lot of international institutions, which have a long term investment appetite and are keen to participate in operational highway projects with stable toll revenue outlook. These investors generally hesitate from taking construction risk but are willing to look at de-risked Brownfield road assets, he said, adding that the investors include Abu Dhabi Investment Authority (ADIA), Ontario Teachers’ Pension Plan, etc.
He said that under this TOT model, the right of collection of user fee (toll) in respect of selected operational NH stretches constructed through public funding is proposed to be assigned for a specific time period, to developers/investors against upfront payment of a lump-sum amount to the government. Further, during the tenure of the contract, the operation and maintenance responsibility would remain with the assigned developer/investor.
A senior NHAI official on condition of anonymity said, “This is not a ‘distress sale’ of assets. These assets continue to remain in the sovereign. Only the toll collection rights are being transferred for a specific period along with maintenance obligations in lieu of a lump sum upfront fee. The fee is to be determined by market in an open competitive and transparent manner. Such asset recycling has successfully being tried in other geographies of the world in the past.”
With the increase pace of National Highway construction in the country, the number of public funded operational highway projects is likely to increase over time. Such completed and operational public funded projects in some cases have been bid out under the OMT contracts wherein the selected concessionaire is required to take care of the projects operation and maintenance of around six-nine years depending on when the major periodic maintenance is due.
But the biggest limitation of this model is that it’s a short tenure model and NHAI fails to get an upfront payment for investments which the TOT will provide now.
The road ministry official said, “The corpus generated from proceeds of such project monetization could be utilized by the government to meet its fund requirements regarding future development and operation and maintenance of highways in the country. This could address development/strengthening of highways in unviable geographies. The model would facilitate efficient toll realization through private sector.”
The initiative is also likely to create new business opportunities for a new vertical of developers who specialize in operation and maintenance of highways, category of investors (Institutional Investors including Pension and Insurance Funds, Sovereign Funds, etc.) which is averse to taking construction risks but is adequately equipped for making long-term investments in road infrastructure.