Busier roads, the new mantra for road monetisation

The InvIT plan involves picking highways with high-traffic volumes and bundling 3-4 of them under a trust or a SPV.

Busier roads- Constrofacilitator

Busier roads, the new highway plan by the government is expected to eventually turn out to be a major driver of its road monetisation efforts.

The road transport and highways ministry is lending the final touches to a proposed infrastructure investment trust (InvIT), to be helmed by the National Highways Authority of India (NHAI), for a number of projects, reports have revealed.

NHAI Chairman NN Sinha said the ministry is waiting for the approval from the Cabinet and once it comes, NHAI will be floating the InvIT soon.

NHAI has plans to ask the government for more budgetary resources and it is also mobilising resources from the market besides revenue stream from highways construction.

India has the world’s second biggest road network. The Road ministry has further plans to develop about 60,000 km of highways over the next five years.

According to estimates by consultancy firm KPMG, highways construction in India will require about Rs 19 lakh crore in the next five years, and the government will need to set up innovative financing mechanisms to address any funding gap.

The proposed InvIT aims to help monetise NHAI’s road assets by mobilising resources through capital markets, Road Transport minister Nitin Gadkari said.

It may be recalled here that India’s first InvIT was set up by IRB Infra Developers. The offer included six completed road stretches, spanning over 3,000 kms over five states.

Specifics of the new plan
The new InvIT plan primarily involves picking highways with high-traffic volumes and bundling 3-4 of them under a trust or a special purpose vehicle (SPV).

Investors will bring in equity into the InvIT and the SPV will then be traded on stock exchanges. Its performance in capital markets will determine what kind of returns investors get.

There are going to be two modes of monetisation — first, the proposed InvIT and second, the existing TOT (toll-operate-transfer). The decision regarding which mode to choose for which project will be taken by the highways authority.

The government sees the upcoming InvIT as having more potential to woo prospective investors. Therefore, more lucrative projects will be listed under this mode. That doesn’t, however, mean that the other monetisation mode will be less lucrative, but “for a beginning, InvIT will take precedence over TOT,” the Business Standard newspaper quoted NHAI officials as saying.

TOTs are basically ocntracts for operation & maintenance of road assets given to companies, for 25-30 year durations. Investors bid for such projects and NHAI gets unfront payment from the winning bidder.

India’s highway math
There were media reports last month that the NHAI had been asked to stop building roads after its debt ballooned seven-fold over the last five years. Reports said the road infra business was becoming financially unviable in India because of rising construction costs and higher outgo on account of land acquisition (which alone accounts for 30% of NHAI’s expenses).

As per an SBICap Securities estimate, an outstanding debt of Rs 1.8 lakh crore means NHAI will have to shell out an annual Rs 14,000 crore on interest servicing, which is significantly higher than the Rs 10,000 crore it garners as toll.

According to a Bloomberg report, the PMO is now making a push to revert to the old model used under Manmohan Singh. NHAI would hand projects to developers via auction. Private builders will then build the roads, collect toll for a pre-agreed period and then transfer the asset back to government when that period expires.

Modi had originally done away with this mode in the wake of poor participation by private players. He had then allowed NHAI to bear as much as 100% of the costs in certain road projects that eventually led to the ballooning debt, Bloomberg said. That is also where the source of the critical sector’s current funding gap lies.

KPMG’s report, titled ‘Roads and Highways Sector – Current Trends and Future Road Map’, underlines the need for innovative financing mechanisms to deal with that funding gap.

The report said that assuming average construction cost of approximately Rs 30 crores per km (including land acquisition cost), and factoring in inflation for road construction cost at a conservative 3%, the total funding requirement over five years is estimated at approximately Rs 19 lakh crores which amounts to average annual fund requirement of approximately Rs 3.8 lakh crores.

The success of the new monetisation plan is critical in view of the fact that a slowdown in road-building usually has negative ripple effect on many other sectors of the economy dependent on roads. According to analysts, putting the brakes on highway-building — a basic necessity for a country’s socio-economic development — could put at risk India’s goal to become a $5 trillion economy.

Source: Economic Times