1 November, 2018
With a view to monetise the operational national highways, the National Highway Authority of India (NHAI) introduced the Toll Operate and Transfer (TOT) model for partnership with private developers in the road sector. Under this model, NHAI passes on the toll collection rights and operation and maintenance obligations for 30 years to the private developer against payment of upfront, one-time, lump sum concession fees quoted by the private developer as part of the comprehensive bidding process. Projects under this model are awarded as a bundle of operational national highways, which allows the investor to offset the risks of one project against another. Since existing and operational roads are auctioned under the TOT model, it does not need developers with construction skills to participate.
First Bundle of Projects under TOT Model
In March 2018, Macquarie Group, the Sydney-based infrastructure asset management company, won the maiden bundle of nine highway projects in the States of Andhra Pradesh and Gujarat under the first tranche of a monetisation drive pursuant to the TOT model. As against the base bid price of Rs. 6258 crores set by NHAI, the bid was won by Macquarie Group for an amount of Rs. 9681 crores making it one of the largest foreign direct investments in public infrastructure in India.
The concession agreements with NHAI for attaining rights of toll collection on such highways, each for a concession period of 30 years, were executed on April 26, 2018 by the special purpose vehicles (SPVs) floated by the Macquarie Group.
This first prodigy of the TOT model was culminated in the last week of August 2018, with the aforesaid SPVs making the payment of the requisite upfront concession fees to NHAI in terms of the concession agreement executed by them and NHAI handing over the toll collection rights to the SPVs.
Financing of the First Bundle
On account of the requirement of payment of the upfront concession fees to NHAI, the model involved significant upfront capital contribution . Banks and financial institutions have shown keen interest to support the model and participate in the financing of the payment of the concession fees to NHAI.
As a lead banker and underwriter, YES Bank Limited provided funding to the SPVs of three rupee term loan facilities aggregating to INR 6,100 crores for financing the upfront concession fees payable to NHAI, meeting the costs to be incurred for initial improvement works of the project highways, first major maintenance expenditure and for other transaction related costs.
Encashing on the opportunities available on account of the bundling of the projects, the aforesaid financing required that each of the SPVs utilise surplus amounts lying in their respective escrow accounts to meet any shortfall in the cash flows of any of the other SPVs. This would enable it to meet its obligations towards debt servicing and/or maintenance of debt service reserve accounts in terms of the financing documents executed by them and for the said purpose extend inter-company loans to the other SPVs. The financing was further backed by each SPV providing a guarantee to the extent of its ‘surplus monies’ for any insufficiency in meeting the debt service obligations of the other SPVs towards its respective lenders.
The principals called upon legal and commercial expertise for the instant transaction, with Cyril Amarchand Mangaldas acting as legal counsel to YES Bank Limited. The transaction involved rendering structuring advice and complex documentation to capture inter alia aforementioned cash pooling of surplus cash proceeds, a cross guarantee amongst SPVs and cross collateralisation with respect to surplus accounts of the companies within the confines of the concession agreements executed by the SPVs with NHAI. This required detailed analysis of the Concession Agreement and the response provided by NHAI to the pre-bid queries.
Further Opportunities
With the success of the first bundle under the TOT model, NHAI has already identified 75 road projects for implementation of the TOT model, which will help them raise upfront capital to fund road projects based on engineering, procurement and construction and hybrid-annuity models.
NHAI has already rolled out its bids for the second bundle comprising seven national highway stretches across Tamil Nadu, Telangana, Rajasthan and Gujarat and has identified ten projects across Uttar Pradesh, Bihar and Jharkhand for the third bundle under the TOT model. NHAI is expecting to monetize these 75 public-funded national highways with a road length of around 4,500 kilometres that can together fetch around Rs. 1 trillion for the Government.
With 100% foreign direct investment being permitted under the sector under the automatic route, foreign investors have participated in the bidding for the first bundle and have shown keen interest for bidding for further bundles under the TOT model regardless of the specific consent requirements of NHAI (from a national security and public interest perspective) for holding by a foreign entity of 25% or more equity in the developer.
With roads at the centre of infrastructure development and the Union Government aggressively promoting the TOT model, the National Highways Authority of India’s (NHAI’s) decision to tap funds through innovative methods brings ample opportunities for private sector developers, funds, banks and lending institutions to participate in the TOT model.
For further information, please contact:
Subhojit Sadhu, Partner, Cyril Amarchand Mangaldas
subhojit.sadhu@cyrilshroff.com
