CRISIL Research estimates that the first 75 operational highway projects tendered under the toll-operate-toll (TOT) model may fetch around Rs 40,000 crore, much lower than what the government had initially estimated.

That’s because investors would factor in the freight-heavy nature of national highway traffic in India, the associated volatility, and the reduction in road freight growth expected after the implementation of the Dedicated Freight Corridor (DFC) by the Indian Railways. Further, implementation of the Goods and Services Tax (GST) regime, while not necessarily negative for road traffic, may alter the type of vehicles that would be used on certain routes.
 

The calculation assumes annual toll revenue growth of 7-8% and returns on equity of 14-16%. Theoretically, Rs 40,000 crore can fund the construction of 2,800 km of four-lane national highways, which would be equal to the execution expected in fiscal 2017.
 

Says Prasad Koparkar, Senior Director, CRISIL Research: “Variation and volatility in traffic can reduce returns. Investors would take a hard look at this, including the impact of DFC and GST when placing bids. They would also be wary of latent defects in roads that are not detected during the technical examination. Another grey area pertains to competing roads; if an alternate route is built and is longer than the original stretch by 20%, then it is not treated as a competing route."
 

CRISIL Research estimates that between fiscals 2018 and 2020, construction of highways would require investments of Rs 2.2 lakh crore, or more than twice the Rs 1 lakh crore set to be spent between fiscals 2015 and 2017, with a higher execution of publicly funded projects. Such a gargantuan increase in funding requirement would necessitate tapping new avenues of funding. The TOT model is one such, where the authority transfers ownership – and the right to collect toll -- of operational highways to private entities for as long as 30 years in return for a one-time upfront payment. 
 

Says Ajay Srinivasan, Director, CRISIL Research, “TOT could achieve the dual objective of releasing both the bandwidth of public agencies – otherwise used up for road maintenance activity -- and funds for road construction. While traffic risk does exist in this model, offering bundles of diversified stretches – both by geography and traffic composition – could mitigate some of this risk. Bidding through special purpose vehicles set up by infrastructure investment trusts (InvITs) or transferring ToT projects to InvITs after 2 years would also aid better management of risks.”
 

Today, ~ 6,500 km of highways are being maintained by the NHAI using public funds and this number is expected to more than double over the next 5 years.
 

Previous maintenance models such as the operate-maintain-transfer (OMT) did not succeed because there was fixed annual increase in payments to the authority irrespective of traffic. Contract tenures were also shorter, leading to poor maintenance. As a result, only 2,500 km of highways have been awarded on OMT so far with just 6-7 firms participating in such projects.