Competitors and analysts called the global investor “too aggressive” when it won the fist toll-operate- ‘transfer (TOT) bundle of highways — a lage part oft on the Golden Quadrilateral — at a hefty premium to 'NHAY' base auction price. A year and a half later, it seems Macquarle outwitted rivals and picked up NHAV's best assets I ‘n March 2018, an Australian institutional investor walked away with some prized toll-road assets on the Golden Quadrilateral in the first auction for toll-operate-transfer (TOT) bundles. “Macquarie Infrastructure and Real Assets (MIRA) had bid aggressively, almost 55% over the base price, and many thought it was a flawed decision. But it may just have picked up some of [National Highways Authority of India’s (NHAI) best assets, Toll collections are likely toexceed expectations, reveals an analysis of FY19 figures . MIRA is one of the world’s largest infrastructure asset managers. Indeed, MIRA may have been a smart mover all along, outwitting local players like National Investment and Infrastructure Eund and IRB Infrastructure Developers, and international peers like Roadis and Brookfields. after picking up nine assets in the first round/bundle of TOT ‘auctions, it has stayed away from bidding in the second round and is also absent from the ‘ongoing third round. MIRA had a plan in place. Inthe first bundle, six of the nine stretches are located on the Golden Quadrilateral. Compared to that, the second, third and fourth TOT bundles donot have a single road on it. Not surprisingly, TOT toll roads have commercial traffic of 85%, much higher than the national average of about 75%. ‘When Macquarie bid for the TOT 1 bundle, not only was it ata significant premium to the NHAL base price, it was also 30% higher than the price quoted by the second bidder — Brookfield Asset Management. While most market participants still believe Macquarie may have overpaid, FY19 toll collections suggest otherwise, Under the TOT model, NHAI grants operation and toll-collection rights for 30 years to private operators. Projects are given as a bundle of operational highways to offset the risks of one project against another.lechapuram Tollway —a 45.21 a 59.72 Puintola Tollway EEE 39.85 PEED 44.07 Diwantham Tollway (41.49 NN 63.14 Siddhantham Tollway EE 37.08 NEE 60.47 Ankapalli Tollway 122.2 Ln 147.34 Diwancheruvu Tollway Garamore Tollway 95,39 117.15 Porbandar-Jetpur Tollway mam 18.03. a 27.33 @ FYI8 @ FYI9 MIRA completed the transaction with NHAI on August 29, 2018. These nine toll roads have reported a total toll collection of INR664 crore in FY19, up almost 30% over the previous financial year. ‘To top that, NHAI has also approved toll hikes effective from April 2019 across all the nine stretches of TOT 1, hugely increasing the probability of Macquarie posting robust toll revenues {in FY29, its first full year of operations, Of the nine stretches, six are in Andhra Pradesh and three are in Gujarat, Both states have decent law and order and compliance regimes and have been growing at a higher rate than the national GDP. On the other hand, the second and third bundles have road assets from West Bengal, Bihar, Jharkhand, and Uttar Pradesh, which may not be ideal states for an. international investor to operate. It’s another reason why Macquarie, Canada’s Brookfield Asset Management, and pension funds such as CDPQ.and Canada Pension Plan Investment Board (CPPIB) have been absentIt’s another reason why Macquarie, Canada's Brookfield Asset Management, and pension funds such as CDPQand Canada Pension Plan Investment Board (CPPIB) have been absent from bidding in the subsequent TOT auctions. “ maequarie did evaluate bundle 2 and bundle 3, but because of the location and issues with the quality ofthe roads (potholes, ete), it did not participate,” says a source working with an institutional investment firm, Before being taken over by Macquarie, these road stretches were operated by small contractors who typically get one-year contracts to collect toll. Under these operate- ‘maintain-transfer (OMT) contracts, there isa revenue-sharing pact between the government and the contractor. The contractor which gives the government the highest share of payment upfront gets the contract and collects the toll Since the same contractor would want to bid again the next year, it will likely under-report the toll road's performance, so that it can pay @ lower premium to the NHAI, says a source with a global institutional infrastructure fund. This leads to unreliable traffic data and information asymmetry in the system, he adds, Due to the short-term contract, the OMT contractor does not even have the incentive to upgrade toll collection systems or instal automated traffic sensors and other such devices. ‘The TOT model addresses these issues to a large extent. Lacklustre interest in TOT assets ‘Meanwhile, alittle over a week ago, the bids for the third bundle of TOT opened to a tepid response. Cube Highways emerged as the highest bidder, quoting a price of INR5,011 crore, or 4 premium of just 0.3% over the NHAI’s base price of INR4,995 crore. ‘The other two bidders, L&T-NIIF and IRB Infrastructure Developers, quoted INR4,230 crore and INR3,510 crore, respectively, much below the base price. While most market participants largely expect Cube Highway’ bid to be awarded the third "Torbundle, the NHAI’s decision is yet to be announced. The NHAI on its part will be happy to reach the halfway mark of its asset-monetisation target of INR10,000 crore at a time when is facing a lack of funds to finance its road-construction projects.Dwindling bidding interest in TOT auctions TOT auction bundle 1 TOT auction bundle 2 TOT auction bundle 3 CAGR: CAGR: 15.9% CAGR: 20.0% ‘1B Number of bids received I Number of bids above NHAI base price CCAGRIs for assets for sale Source: SBICAP Securities: NHAI BETPrime By the end of the year, NHAI also hopes to complete the auction of TOT bundle 4 to meet its asset-sale target. But progressively, over the last three auctions, the interest in tolling assets has come down, as the number of bidders and the premium offered over NHAI’s price has been declining, For example, in the third TOT auction, 26 investors expressed interest but eventually only three submitted bids. In the second auction too, only three bids came in, all of them much lower than NHAI’s expectation. It’s not about Macquarie’s tuck In February 2013, Macquarie through its joint venture — Macquarie SBI Infrastructure Investments — acquired 74% stake in the Farukhnagar-Jadcherla project (in erstwhile Andhra Pradesh, now Telangana) ina first-of-its-kind deal, with an institutional investor acquiring a majority stake in a road asset. The deal was signed for INR206 crore in 2013, Between 2013 and 2017, the annwal average daily traffic on the Farukhnagar-Jadcherla road grew at a CAGR of 5.2% and passenger traffic grew at 3%, Toll ollection increased 25% from FYI to FV17. Towards the end of FY17, Macquarie sold the Jadcherla Expressway and the ‘Trichy Tollway (another road asset) to Spanish infrastructure firm Abertis Infrastructure for close to INR, 000 crore. (Operating the Jadcherla Expressway gave the Australian firm the experience and inside track tobetter evaluate the potential of the TOT 1 bundle. "It had traffic data going back 12 years on a route falling in the same corridor as the six projects in Andhra,” says the first source. ‘The bottom line ‘While it was pointed out that the NHAL had set expectations too high for the ToT 2 bundle, with the subdued close of the third auction and doubts being raised about the asset quality of the next round, it seems Macquarie may have bagged the best assets on offer in the four auctions,