Bundling highway projects needed to bring foreign investors to road sector

Foreign players may find these projects unattractive if their total value is less than $200 mn

International pension funds with an appetite for staying invested for several years are expected to be primary suitors for the highway contracts to be auctioned next month by the National Highways Authority of India (NHAI).

Experts say the government wants to generate cash to support its next tranche of investment in the highways sector. They are of the view that foreign pension funds would be keen to bid for such projects because they typically invest in those with a longer duration, unlike private companies, which look for quick results.

“Since most of the construction-related risk is taken care of by the government, the private sector would be interested in these contracts because the traffic is already established and the government is hopeful of getting surplus cash post auctions,” said Adil Zaidi, partner-economic development and infrastructure advisory, EY.

He said the government should plan the highways and alignments it intended to auction.

During consultations with the government, pension funds and sovereign wealth funds had suggested that the financial packages to be offered by the government should be large-sized. For instance, of the 11 projects that are likely to be auctioned in the first round of auctions in August, a particular pension may be interested only if it wins at least three or four such contracts. The value of these projects should not be less than $200 million.

Global pension funds might be attracted by the certainty of the return on investment, an analyst said.

Last year, the Cabinet Committee on Economic Affairs authorised the NHAI to monetise 111 publicly-funded National Highway (NH) projects that were operational and were generating toll for at least two years after the Commercial Operations Date (COD) through the toll-operate-transfer (TOT) model. Around 75 operational NH projects completed under public funding have been preliminarily identified for potential monetisation using the TOT model.

This model would provide an operation and maintenance (O&M) framework, requiring the NHAI’s reduced involvement in projects after construction completion.

Further, the corpus generated from the proceeds of such project monetisation could be utilised by the government to meet its fund requirements regarding development and O&M of highways in the country. This could help the development and strengthening of highways in unviable geographies.

The government aims to cater for that category of investors which is averse to taking construction risks but is adequately equipped for making long-term investments in road infrastructure, e.g. institutional investors including pension and insurance funds, and sovereign funds.

In the past Macquarie, Brookfield, Cube Highways, and other such global funds took equity in NH projects worth Rs 4,150 crore, from which private promoters had exited.

The auction can also be seen as a move to allow the entry of sovereign funds from Abu Dhabi and Qatar into such projects.

Taking the high road to TOT

Under the toll-operate-transfer (TOT) model, the right to collect toll on select highways built by the government is proposed to be assigned for a specific period to developers or investors against an upfront payment. During the tenure of the contract, the operation and maintenance (O&M) responsibility would remain with the developer

• Monetisation of public-funded national highways expected to attract long-term institutional investment
• Global funds keen to participate in operational highway projects with stable toll revenue outlook
• In August 2016, Cabinet authorised the NHAI to monetise public-funded projects that are operational and are generating toll revenues for at least two years after the commercial operations via TOT 
• The monetisation will be subject to approval of the competent authority in the Ministry of Road Transport and Highways/NHAI on a case-to-case basis
• Around 75 operational projects completed under public funding were identified for potential monetisation using the TOT model
• This model would provide an efficient O&M framework, requiring reduced NHAI involvement in projects
• Further, the corpus generated from the proceeds of such project monetisation could be utilised by the government to meet its requirements on development and O&M of highways in the country