Driving asset monetisation through an innovative concession model

NHAI Operational Toll Road Concession

Context

• The government of India sought to raise c. USD 12.5B1 for infrastructure development through an asset monetization program that identified c. 6400km of road networks across 75 operational projects and split them into 10 bundles to auction as concessions
• From the monetization of its highway assets, the Indian government in conjunction with the National Highway Authority of India (NHAI) estimated that it could raise c. USD 3.5B

Problem

• The NHAI's primary framework for highway development, build-operate-transfer (BOT), presented an unattractive risk profile to potential concessionaires due to uncertain land acquisition processes and the difficulty of accurately forecasting traffic densities
• Private sector interest in PPPs was low across sectors due to the absence of a reliable pipeline of attractive projects

Innovation

• To overcome these challenges, the NHAI introduced the toll-operate- transfer (TOT) framework – which limits the private sector's exposure to navigating complex land acquisitions and lengthy permit approval processes
• In the TOT model, concessionaires made one-time, upfront lump-sum payments in return for exclusive toll collection rights for a period of 30 years over which they would operate and maintain the concessions

Stakeholders Involved

• National Highway Authority of India (NHAI) – Government agency responsible for the management and monetization of India's highway network
• Macquarie Group – Lead investor on Bundle I projects tendered by the NHAI
• Government of India – Launched asset monetization program

Results/Impact

• Macquarie made an upfront payment of c. USD 1.2B to the NHAI to secure TOT Bundle I – approximately 1.5 times the value NHAI had valued it at
• TOT Bundle I resulted in Total Cash Flow of c. USD 1.6B to the Indian Roads sector enabling the Indian government to raise capital for greenfield infrastructure projects without relying on debt or increasing taxation
• The successful tender of Bundle I triggered 3 additional concessions by the NHAI that were considerably less successful than Bundle I, either failing to meet their assessed values at auction or attaining no successful bids

Key lessons learnt

• Emerging market governments can incentivize private sector participation in infrastructure by adopting solutions like the NHAI's TOT model, which limits the private sector's exposure to navigating complex land acquisition processes and permit approval processes that are prevalent in greenfield projects
• The relative failures of tender processes for Bundles II, III and IV illustrate the importance of having fundamentally attractive assets in asset monetization programs. While the TOT model is useful, it cannot overcome flawed revenue models underpinning an asset's value
• The development of the TOT model, and transaction program, demonstrate the importance of medium- term strategic planning. This enables sectoral organizations to plan beyond individual transactions and to develop a degree of standardization needed to attract credible private partners capable of creating long-term value.