Trends and Outlook

Sector looks at new funding avenues

The new government has once again lined up big plans for the road sector. Plans are in place to resume work on all the stalled highway projects within 100 days of coming to power. The government has also planned the development of 22 greenfield expressways and a grid of roads. In a bid to revive private sector interest in the sector, about 3,000 km of projects will be bid out under the build-operate-transfer (BOT) route.

The sector has witnessed a major turnaround in activity due to the launch of new policies, business models, projects and programmes. Significantly, the Ministry of Road Transport and Highways (MoRTH) has invested over Rs 11 trillion in the sector during the past five years. The hybrid annuity model (HAM) has largely met with success due to the government’s proactive approach of obtaining all clearances prior to project award.

Trending sources of finance and uptick in project activity

  • The road sector continues to be given priority in the government’s infrastructure development agenda. The ministry has reported the award and completion of projects spanning over 57,000 km and 40,000 km, respectively, in the past five years. Projects under HAM have a major share in the total length of awarded projects with over 125 projects awarded under the model so far. Meanwhile, the construction rate rose to 30 km per day in 2018-19 from 12 km per day in 2014-15. There is also a growing focus on road construction in the north-eastern region. National Highways and Infrastructure Development Corporation Limited (NHIDCL) is currently involved in the implementation of over 290 projects covering about 12,500 km at a cost of Rs 1,825 billion (as of May 2019).
  • Huge investments have been made in the sector with total investment increasing by more than three times from Rs 519 billion in 2014-15 to Rs 1,588 billion in 2018-19.
  • The budgetary allocation for the MoRTH has increased by Rs 50 billion during 2019-20 vis-à-vis 2018-19. The government has given a major impetus to rural connectivity through the Pradhan Mantri Gram Sadak Yojana (PMGSY). PMGSY III is envisaged to upgrade 125,000 km of road length over the next five years, at an estimated cost of Rs 802 billion.
  • While the year-on-year increase in budgetary allocations continues, the MoRTH and the National Highways Authority of India (NHAI) on their part have made serious attempts towards tapping innovative means of raising funds for financing road projects. Recently, NHAI signed an MoU with the National Investment and Infrastructure Fund for cooperation in the creation of special purpose vehicles (SPVs) to execute the fund arrangement for the implementation of large-sized projects, particularly greenfield projects, to be executed by NHAI in the future.
  • Meanwhile, the government’s efforts to tap innovative means of financing continue to grow. For instance, asset monetisation through the toll-operate-transfer (TOT) model has been taken up. The first bundle of nine highways spanning a length of about 680 km was monetised successfully for Rs 97 billion. The second bundle received a lukewarm response from investors and is being reconfigured.
  • Meanwhile, the third bundle has recently been put up for bidding, and NHAI has recently organised a roadshow for the third bundle.
  • NHAI is also looking at bringing in equity partners for funding highway projects. It is likely to form an SPV for the Delhi-Mumbai Expressway and seek equity participation.
  •  In the corporate financing market, the focus on listing assets under infrastructure investment trusts (InvITs) has grown. So far, IRB Infrastructure Developers Private Limited, L&T IDPL and Oriental Structural Engineers have listed their assets under InvITs. Reportedly, NHAI is also planning to float its InvIT soon.
  • With regard to arranging funds, over 45 projects awarded under HAM since 2016 have achieved financial closure.
  • While the overall financing scenario has improved, a few big players with asset-heavy portfolios have succumbed to the rising stress in the corporate debt market. That said, key players such as Hindustan Construction Company (HCC), Essel Infraprojects and Reliance Infrastructure are now looking at hiving off their existing portfolios to follow an asset-light strategy. Since August 2018, at least 10 project equity deals have been struck in the market. Close to 50 per cent of these deals have been finalised by Cube Highways and Infrastructure Private Limited. The biggest deals include IndInfravit Trust’s acquisition of Sadbhav Infrastructure Project Limited’s nine operational road assets, GIC’s acquisition of IRB’s nine road assets, and Cube Highways and Infrastructure Private Limited’s acquisition of Reliance Infrastructure’s Delhi-Agra toll road project. The number of corporate debt restructuring cases is also on the rise as the Infrastructure Leasing and Financial Services Limited saga continues to unfold.
  • Project financing in the state road segment continues to depend on budgetary resources and multilateral funding. A number of loan agreements have been signed and approved in the recent past. For instance, the Asian Development Bank approved a $350 million loan for rehabilitation and upgradation of roads in Chhattisgarh; the central government signed a Rs 24.7 billion loan agreement with the Japan International Cooperation Agency for the Chennai Peripheral Ring Road project; and the central government, the Rajasthan government and the World Bank signed a loan agreement worth $250 million for the Rajasthan State Highways Development Program II. However, in a major jolt, the Asian Infrastructure Investment Bank (AIIB) reportedly announced that it will not fund the Amaravati capital city project in Andhra Pradesh. The declaration came a week after the World Bank pulled out of the $300 million loan for the Rs 1.09 trillion project. AIIB had earlier agreed in principle to fund drinking water, electricity, roads and drainage schemes under the project.

Promising outlook: Steady march forward

  • In the future, mega projects such as Bharatmala, Setu Bharatam, Char Dham Connectivity, and the development of economic corridors will be the biggest investment drivers in the sector. The government has set ambitious targets for the next five years, offering plenty of opportunities to all stakeholders.
  •  Plans are afoot to launch Bharatmala 2.0 to help states develop their road networks. The government will also carry out comprehensive restructuring of the National Highways Development Programme to ensure that a national highway grid of desirable length and capacity is created in an economically viable manner.
  • The MoRTH also has plans to auction close to 15,000 km of completed highway projects by 2024-25 under the TOT model, so as to find resources outside of budgetary allocations to fund its upcoming highway projects. Of these, around 5,000 km of road assets, divided into 10 bundles of 500 km each, have already been identified. Besides, it is also planning to seek cabinet approval for flexibility in determining the concession period of TOT projects, from 30 years at present to around 20 years. To supplement the ministry’s fiscal capabilities, the Life Insurance Corporation of India has offered a line of credit worth Rs 1.25 trillion and valid through 2024 to NHAI to fund highway projects.
  • As per the MoRTH, what remains to be dealt with is the bureaucratic logjam. Since most pending issues have been addressed, private players should now make attempts to make the most of the opportunities offered by the government. Meanwhile, the ministry is also in the process of formulating a new policy to resolve stalled highway projects, including those where proceedings have been initiated against the companies before the National Company Law Tribunal. As per the policy, road development agencies including NHAI and NHIDCL can foreclose contracts by signing supplementary agreements.
  • Overall, while the outlook for the sector is promising, India Infrastructure Research is of the view that both the government and private players need to follow an asset-light strategy to sustain the pace of asset creation. Overleveraged portfolios will only lead to the creation of stressed assets, as has happened in the past.
  • Besides, as technology deployment gains traction, innovative ways of preparing detailed project reports and software-enabled asset management strategies will go a long way in ensuring both cost and time optimisation.

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