The development of any nation, particularly of a large and populous nation like India, depends on the transportation networks and the ways in which they are maintained. For this, India is working under Bharatmala Pariyojana, an umbrella program for the highways sector that focuses to bridge critical infrastructure gaps through effective interventions to improve freight and passenger movement across the country.
FICCI and CRISIL, in recent white paper “Rekindling private investment in roads and highways”, suggested several ways to rejuvenate the investments flowing in from the private sector. Introduction of innovative Public-Private Partnership (PPP) models has led to mitigation of financial and development risks and has propelled growth in the sector. The pace of constructing highways in India has witnessed a steep rise.
At 27 km a day, the pace of constructing highways in India could be one of the fastest globally. The government plans to increase this to 40 km a day by next year. A key reason for the quick pace is the adoption of Public-Private Partnership (PPP) models like Hybrid Annuity Model (HAM) for project execution. Yet, maintaining and increasing this aggressive pace will require higher private sector investments.
PPP models gained traction during the National Highways Development Project era, with BOT (both toll and annuity models) projects contributing the most. This trend held over fiscals 2006-2013. From fiscal 2013, interest in PPP projects declined due to several factors like over-aggressive bidding by road developers, optimistic traffic projections, slowdown in economy and build-up of non-performing assets in banks.
To reinvigorate private sector interest, the government came up with new models such as HAM and TOT (toll-operate-transfer), which decreased both the development and financing risks of developers. It was also decided to award HAM, engineering-procurement-construction (EPC) and BOT (toll) projects in 60:30:10 ratio. This put PPP projects in the roads and highways sector back on track.
The government introduced TOT model to monetise operational road assets. In this, private developers were given tolling rights on operational road projects in return for an upfront fee to the government. First TOT bundle was bid out at Rs 9,681 crore, about 1.5 times the initial estimated concession value (IECV) of the NHAI. It opened the doors for entry of a new class of investors into the roads and highways sector – pension funds and sovereign wealth funds.
The introduction of innovative PPP models boosted private sector interest in roads and highways, but more is required. The NHAI has to raise Rs 1.4 lakh crore over fiscals 2018-2022 through PPPs just to meet the ambitious target set for Bharatmala Pariyojana. In order to attract such huge investments, the government may consider removing impediments through reforms and encourage private sector participation.
Some of these issues are financing constraints (on account of delay in financial closure), lengthy land acquisition and clearance process (on account of cost and time overruns) and developers’ stretched balance sheets (on account of aggressive bidding during pre-fiscal 2013 period).
The government has taken a number of initiatives to mitigate the challenges for private players. These include modification in the concession structure (premium deferment, 100% equity disinvestment, one-time fund infusion), institutionalisation of the arbitral process and acceleration of land acquisition (by giving more authority to the NHAI’s regional offices and introduction of BhoomiRashi portal).
A few more recommendations that government may consider to attract private investment into the sector are as follows:
- Explore the option of using infrastructure investment trusts (InvITs) as a source of finance for the Bharatmala Pariyojana.
- Encourage the portfolio sale of assets to strategic and financial investors. This will help asset developers to generate funds to invest in new assets. It will create a stable cash flow for investors.
- Introduce TOT bundling of HAM projects. HAM projects are now getting operational and high-traffic HAM road assets can be bundled into TOT.
- Introduce innovative PPP structures such as modified HAM with tolling rights to the concessionaire, BOT (toll), and EPC (hybrid) to reinvigorate interest of road developers.
- Explore value capture financing (VCF) as a tool to monetise land around expressways, city ring roads, etc.
- Explore infrastructure debt funds (IDFs) and similar structures and encourage pension funds to start investing in under-construction projects.
(The author is Chairman, FICCI Committee on Infrastructure and CEO (Roads, Railway, Metro Railway, Water & Waste Water), Adani Infra India Limited)