On the road to new opportunity

There have been several milestones along the National Highways Authority of India’s  (NHAI’s) road to development, and the next one appears to be the launch of its infrastructure investment trust, or InVit. At a fundamental level, InVits are the most logical vehicles for owning cash generating infrastructure assets. A gradual transfer of operating roads to newly-launched public and private InVits is already underway.

In all likelihood, bidders for toll-operate-transfer  (ToT) projects have also factored in eventual transfer of roads to InVit. By launching its own InVit, the NHAI is broadening the market for transfer of more operating assets into these vehicles. There is an argument to be made that InVits present an unprecedented opportunity for the NHAI to not only raise funds, but also have a transformative impact on the Indian roads sector. Here’ s what InVits can do:

Bring focus back to core objectives: Over the years, NHAI has re-invented itself from a road development entity to a concession-granting one. Recently, it has developed capabilities to monetise roads through the ToT programme. For the roads developed on engineering, procurement and construction basis, it also undertakes operations and maintenance (O&M). It is not easy for any organisation, and more so for a public sector entity, to be effective across the entire gamut of its activities. By launching an InVit, NHAI can not only transfer roads but also the O&M aspects of these roads, enabling it to refocus on its development role and, thus, create the much-needed extra management bandwidth. 

Raise O&M and safety standards: O&M and road safety do not get due recognition in India and poor road user experience is a common grievance. For NHAI, InVits create an opportunity to raise standards by factoring in equipment and processes on these roads, which will not only improve user experience and safety but also create an ecosystem for other road concessionaires to match these standards. Just as the DNA of NHAI is development, the DNA of  InVits can be O&M and safety.

Monetisation of roads: Currently, the road monetisation programme is lumpy and given the length of time taken to complete the sale process, it is fraught with market vicissitudes and other external factors. While ToT1 was a great success, the subsequent bundles have not achieved the same level, in turn adversely affecting the fund-raising plans for NHAI. A well-defined and transparent framework under which operating roads can be transferred to InVit will streamline the entire fund-raising process for NHAI in more ways than one. 

Crowd-in domestic savings: Indian infrastructure sector, including roads, relies on attracting foreign savings through infrastructure funds, sovereign wealth funds, and global pension funds. Indian domestic long-term savings have largely been staying away from investing in infrastructure as an asset class. Globally, infrastructure assets have been a meaningful part of long-term savings portfolios. For such investors, roads have an advantage over other asset classes as the tariff of roads has an inflation adjustment mechanism. If the NHAI is able to set up proper governance for InVit, then this potentially can emerge as an ideal vehicle for domestic savings pools like Employees' Provident Fund Organisation, public and private insurance companies and cash-rich corporates to diversify a part of their investments. This can thus create a crowd-in effect for other private InVits in roads and the infrastructure sector overall to tap into the domestic savings pool, and eventually create a virtuous cycle of infrastructure development.

Separate dispute resolution for investors: If India has to develop a sustainable roads development programme, it needs more of the long-term capital to flow into the sector. A necessary condition for this capital is to have a robust framework for disputes to be settled expeditiously. The nature of these disputes will be quite different from those relating to development and construction of roads. Setting up of this InVit provides an opportunity for creating an independent framework for settlement of issues pertaining to operating roads, which will benefit not only this InVit but other similar road-holding entities as well.   

Independence of investment manager: The most critical role in any InVit/fund is of its investment manager. The investment manager has fiduciary responsibility towards investors and if there is one thing that sophisticated financial investors abhor, it is the related-party aspect of any arrangement. The relationship between NHAI and InVit will have multiple layers of related-party engagements, such as which roads to be transferred, the valuation for transfer, and ongoing relationship between the InVit as the concessionaire and NHAI as the concession authority. It is crucial to ensure complete independence of the investment manager of InVits for its smooth take-off and to also engender trust in the investment vehicle. Anything less will compromise the long-term appeal of InVits, and also expose it to challenges that might emanate from related-party arrangements between the InVit and NHAI. It is absolutely critical to incorporate suitable features in the structure, governance and management of InVit to address these issues.

In conclusion, NHAI’s InVit holds the potential for landmark systemic changes to the way roads as a sector has developed in India. A bold vision, transparent structure and strong execution could lead the NHAI and InVit on to the road to success. 

The writer is former head, India & South East Asia, at Macquarie Infrastructure and Real Assets. Views are personal