Toll road investment, financing and M&A

Author:Jianxin Peng


A toll road is defined as a road (including a bridge and tunnel) that complies with the Highway Law and the Regulation on the Administration of Toll Roads, for which highway tolls are charged, with approval. According to the regulations, investors may participate in the operation and management of toll roads by an investment in the construction of privately operated roads, and the acceptance of the transfer of rights and interests in toll roads.

In toll road investment, financing and M&A, it is necessary to pay attention to the following points, as well as common issues, including the historical development of an investment, claims and debts, and property rights:

Entity eligibility

Based on the Administrative Provisions on Tendering of Investors for Privately Operated Road Construction Projects, to be eligible for investing in the construction of such developments, the investor shall: (1) have total assets of over RMB600 million and net assets of more than RMB250 million; (2) have made profits in each of the three most recent years and annual financial reports shall be audited by an agency with a legal qualification; (3) have an investment and financing ability not lower than that estimated for the project, with net assets not less than 35% of the investment; and (4) have a good business reputation, without major violations of any laws.

To be eligible for accepting the transfer of the rights to charge tolls for using the road, the investor shall: (1) have a good financial position, with owner’s equity not less than 35% of the actual construction cost of the transferred project; (2) have a good business reputation, without major violations of any laws and rules in business activities; and (3) satisfy other conditions specified by laws and regulations.

Cost and income estimation

According to the Regulations on Administration of Toll Roads, “any toll shall not be charged for a toll road which is under construction”, the charging of tolls is subject to the project passing acceptance inspection, the road being actually open for traffic, and the obtaining of an approval from the provincial government. Therefore, a huge capital investment is required in the early stage of the project, making it necessary for investors to have sound capital strength and/or robust financing ability.

It should also be noted that after a toll road is completed and open for traffic, investors need to undertake work including road management, protection, planting, and soil and water conservation within the scope of the land used. If major repairs and alterations of the road are involved, a large amount of capital investment will be required. Therefore, in cost and income estimation, investors should take into full consideration the construction and operating costs arising in the later stages.

Operation and management ability

According to the toll road regulations, the entity operating and managing it shall carry out routine inspection and maintenance of the toll road and facilities based on the standards specified by the state to ensure its good condition. The entity managing the toll road has the responsibility to: set traffic signs and markings, and ensure that they are clear and accurate; design safe and reasonable toll gates, allowing vehicles to pass through them quickly; and report to relevant authorities in a timely manner on traffic accidents and assist in the dispersion of vehicles, etc., after the incident. Therefore, investors should have effective operational and management abilities as well as perfect measures to ensure road maintenance and service quality.

Approval for the right to charge tolls

The charging of tolls for use of the toll road is an important method for investors to recoup their investment. In accordance with the regulations, the toll-collection period for tolls shall not exceed the maximum of 25 years, and the maximum time period determined by China for a privately operated road in provinces, autonomous regions and municipalities directly under the central government, in the Western and Central regions, shall not exceed 30 years. Therefore, in carrying out investments and acquisitions, it is necessary to pay close attention to the toll-collection period remaining on the project.

The toll station setting, toll rates and other matters are subject to hearing and administrative approval, and are less likely to be adjusted once confirmed. Therefore, in conducting investments, mergers and acquisitions, investors shall pay close attention to the approval for the right to charge tolls, and clearly understand the collection period, maximum capacity, toll station setting, rates and mileage, etc., so as to ensure that they can recoup the investment and obtain reasonable returns.

Procedure requirements

The Administrative Provisions on Tendering of Investors for Privately Operated Road Construction Projects states that a direct investment in construction requires: an open tendering procedure; the establishment of a special corporate body after the signing of a project investment agreement; and the legal person and tenderee of the project shall sign the project concession agreement after completing the approval procedures for the privately operated road project.

The Measures for the Transfer of Rights and Interests in Toll Roads requires open tendering for both the transfer of the rights and interests in toll roads, and privately operated roads with investment from financial funds. The transfer of the rights to charge tolls for the use of a national highway shall be subject to the approval of transport authorities under the State Council; the transfer of the rights to charge tolls for the use of roads other than national highways shall be subject to the review and approval of provincial transport authorities, and reporting to the provincial people’s government for approval. After the confirmation by the transferee, the transferor and the transferee shall enter into a contract for the transfer of rights and interests in the toll road in accordance with the laws, specifying the transfer period, price, staff resettlement, assumption of operational risk responsibilities, road transfer method and time, etc.

Toll roads represent a steady source of income, and have a high investment value if investors are able to carry out effective control and accurate estimation as to notes on toll road investment, operation and management, and effectively control road maintenance expenditure.

(Original source: CBLJ Issue 8, 2019.)


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