Now that the Toll Industry has had a few years of maturity. What is the summary of expections from Toll Collection System from a concessionaire’s point of view.

May 10, 2010

(This needs an in-depth analysis on broad parameters. However I have tried to analyze few problems associated with toll roads.)

M S V Ramu
Profession – Contract Manager
Date: May 4, 2010
E-mail: [email protected]

Introduction: with a need a build good infrastructure and lack funds available to finance these Highway project government has undertaken to built highway on Public Private Partnership either toll based or annuity based.
The private developers who bids and undertake constructions of Highway on toll basis needs to implement a through pertinent “risk” management system with the help of the government to mitigate all the risks that come with development.

To understand the various consequence of “tolled” roads there needs to through study to undertaken which is not my purview at the moment. Hence I dwell over some of these consequences based my exposer these projects.

Toll based Highways:
The idea of “Toll based” highways was imported into India from experiences of others countries like Europe, Malaysia or North America. The model “Concession Agreement” was drafted by the Government to suit India needs.

The toll categories of roads are those wherein there are sufficient traffic which can be tolled by the Concessionaire and recoup the investment made him and also make profit. In the event there are not enough tollable traffic to recoup the investment made, it will be offered on annuity basis or with VGP (Viability gap funding) by the government.

The tolled based roads wherein the Government grants private developer specific rights to design, finance, construct operate and maintain the roads. The developer called “Concessionaire” develops covers the investment costs and carry commercial risks since he relays on operation revenue from the tolls remunerated. At the end of the concessional period the road reverted back to government at no extra charges. However if the estimated revenue does not materialize during Concession period the Concessionaire may have to negotiate the concession period (as in other countries) which is yet to happen in India as we are just starting!

In south America there is method of bidding known as “Least Present Value” wherein the winning bidder is the one who asks for “smallest Net Present Value” and period of the concession period ends when the present value of revenue equal to winning bid. This model has not been tried in India.

Risk management in “Toll based” Concession

In the present circumstances the Concessionaire undertakes risks to constructs road which is generally divides normally into three parts:

  1. Certainty – decision maker know exactly the outcome
  2. Uncertainty – here the decision maker does not know the risks due to non availability of any data
  3. Risks – are those which can be determined by statistical terms and can be analyzed but it differs from uncertainty

In risk management all the risks are quantified and analyzed and decision taken by the Concessionaire to mitigate the same by way of disciplined approach to critical situation

Developmental risk involves “Land Acquisitions” needed for the project. This is one of the biggest risk faced by the Indian developers as most of the times project gets delayed due non-availability of Land. NHAI does not meet the contractual requirements specified in the Concession agreement thereby causing unnecessary hardship to concessionaire. This risk falls under “uncertainty” which can not be quantified

Financial Risk: Soon after award of Project, the Concessionaire needs to raise the necessary capital required for execution project

There are two major risks involved:

  1. Ability to raise the finance and make financial close as required by the Concession agreement.
  2. High interest rate during the currency of concession period (due to floating interest charged by lenders) – mitigation of this risk in extremely important).

Construction risks

Whether the construction undertaken by the Concessionaire himself or by other contractor there are many risk involved

  1. Poor performance of the contractor
  2. Different site condition which normally experience contractor many not have thought off which is problematic and end up in high cost due additional items of work to be executed.
  3. High price escalation of all the inputs of construction – Example: steel pricing going through roof last year.

All above risk has to be born by the Concessionaire which needs proper approach in the initial stages itself

Operational risks

Operation risk involves mainly the following

State support agreement – needs to signed by the concerned state and they shall support the collection of tolls which important to the concessionaire. NHAI who are promoters of the project should take full responsibility in getting the agreement signed with Concessionaire as Concessionaire can not exert any pressure on the states

Toll Level: the estimated toll level uncertainty during pre-bidding stages can lead to inaccuracies in revenue estimation which the Concessionaire has based his bid. Hence this risk needs to shared by the NHAI

The traffic volume projected in financial model may not materialize as it completely depends on economic growth projected during pre-bidding stage

Any fall in traffic volume will automatically bring down the IRR value projected. Expert estimate that 10% drop in volume of traffic will result in reduction of 1-7% – 1.9% percent reduction in IRR.

Toll collection
The Concession agreement does give any standard specification for the installation of tolling equipment. This has resulted in haphazard manner the tolling equipment being installed by the different Concessionaire. This needs to change. For example a RFID card issued at New Delhi should also hold good down south. By such an arrangement the road user can travel effortlessly any ware in India.

The technology used by the Concessionaire needs to be streamlined on all India basis for all Concessionaire.

Toll fee: The price escalation of “toll/Fee” charged by the Concessionaire is based on all India WPI index. This is incorrect as in some states it may be very high. In my opinion there should be “Toll Regulator” on all India basis to regulate toll based on each state WPI or any other base model

HTMS: Here there is no comprehensive approach. For example the “variable message system” is limited to one project length only! This also needs an all India approach.

Suggestion: at the moment there are so many “Toll” based road are in operation and also on the horizon. All the toll based roads owners are “Special purposed vehicle” promoted by the concessionaire.

So why not a “over the counter” stock listing be arranged of these SPV and listed in Stock exchanges which can also traded in F&O section. I am sure this arrangement will automatically will mitigate many risks and also give scope for improvement in roads as the Concessionaire would like increase the traffic by enhancing the many amenities for road users.

Thanks for taking time for reading this articles.

One comment on “Now that the Toll Industry has had a few years of maturity. What is the summary of expections from Toll Collection System from a concessionaire’s point of view.” Post your comment

  1. Maj Gen (Retd) R N Chakrabarty, VSM on July 21st, 2014 10:11 pm

    Tolling entails three major components viz, ETMS. HTMS and Corridor safety and security. Extensive network of access controlled expressways and highways is essential for the rapid development of the country.

    Incidentally, this fact has now been well identified in our country and due impetus is being given by the present Government.
    some the issues merit consideration in this regard -

    (a) HTMS must include speed enforcement system ie. speed cam, ANPR.
    (b) To preserve road surface, overloading of commercial vehicles must be ruthlessly checked and penalised. All tolls must have SSWIM installed. Policy of penalising overloaded vehicles may have to formulated on all India basis in cosultation with various concessionaires.
    (c) RFID shall be bade mandatory. RFID card/smart card concept shall be formalised on all Idia basis.
    (d) All corridor magement vehicles eg, ambulances, cranes. route patrol vehicles must have vehicle tracking system / GPS installed.
    (e) Various essential components of ETMS. HTMS and corridor shall be integrated for efficient management of highway.
    (f) Apart from Variable Massage Sign (VMS), mobile SMS services may be used to communicate with commuters. On entering the highway, Mobile No must be captured from all commuters.
    (e) I agree that we shall have a toll regulator in the country.

    There could be many such issues and I believe that integrated road network with revolutionary state of art traffic management technology would go a long way in implementing impending highway projects in the country

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