Asset Upkeep: Role of private equity investors in the operations and maintenance of roads

Role of private equity investors in the operations and maintenance of roads

Cube Highways and the Macquarie Gro­up have been prominent investors in India’s road sector. Macquarie’s overall investment in the road sector amounts to $1.5 billion, including the well-publicised ac­quisition of the first toll-operate-transfer (TOT) bundle.

Cube Highways and Transport Assets Advi­sors Private Limited (Cube Highways) controls ap­p­roximately 23 roads in India and is in the pro­cess of acquiring four to five new road projects. Additionally, Cube won the third TOT bundle.

Most private equity (PE) firms have their own operations and maintenance teams, which take a more strategic advisory approach to their res­ponsibilities regarding the maintenance of the assets. All routine tasks, such as route patroll­ing, are outsourced to subcontractors.

New initiatives for pavement maintenance, such as the use of stone mastic asphalt and cold in-place recycling, are also being impleme­nted. It is crucial for investors to invest in significant studies on how to improve road mainte­na­nce. This helps save costs and maintain assets more effectively.

PE firms play a crucial role in operating and maintaining their vital assets. With most of their investments consisting of majority stakes, they ensure that international best practices are followed domestically as well. They also invest in each of their portfolio firms with an emphasis on safety. The priority placed on safety pertains to the well-being of not only road users but also th­ose who are employed to maintain the roads.

Traffic and revenue trends

The road sector was significantly impacted by the second wave of the Covid-19 pandemic. Once the restrictions were removed, there was a continuous rise in traffic. Since then, the volume of traffic on all roads has increased significantly. Things picked up steam quite rapidly in July after the second wave. The second and third quarters were the most fruitful quarters, but in the fourth quarter, there were concerns regarding a third wave of Covid-19 as well as heavy rains in various places where investors owned road assets. The industry was not substantially impacted the third wave due to less stringent restrictions imposed by the state and central governments.

Since January 2022, traffic has increased exponentially. Taking into account passenger traffic and the fact that some sites are still opening up and people are returning to their offices, schools and universities, this particular segment is anticipated to increase at a faster rate. The revenue for March 2022 has grown significantly as compared to that for March 2020. Both the revenue and the traffic numbers have surpassed the pre-Covid levels.

In addition to an increase in the volume of commercial traffic, PE firms have also noticed an increase in the volume of passenger traffic. This was principally caused by the fact that a large number of people have stopped using public transportation in favour of driving their own cars. Another aspect to keep an eye on after the pandemic-related issues are overcome is a reverse model shift. However, once passengers have already transitioned to a more convenient method of transportation, they are unlikely to return to public transportation.


As an independent organisation, the National Highways Authority of India (NHAI) has be­en very optimistic and on the lookout for add­itional ideas for operations and maintenance of assets. It has implemented the TOT model and the hybrid annuity model (HAM), which has encouraged investment in the sector. NHAI has been receptive to investor concerns.

On the challenges front, there are typical re­gu­latory concerns, such as the interpretation of taxation statutes. Similar to the goods and services tax (GST), the interpretation of taxes by the Income Tax Department was a conund­rum in the HAM paradigm.

Most firms’ recent experiences as fund houses have been extremely positive. One of the significant shifts that has occurred is the ease of exit, which is advantageous for inves­tors, who, despite being here for the long term, may make some exits in the long run.

Furthermore, the policies in place as a result of NHAI’s efforts indicate how pragmatic the organisation is and how well it has handled constructive inputs from shareholders. Firms continue to liaise with NHAI regarding wo­rk pa­ce and safety. Due to safety concerns of workers on the job site, the currently adopted meth­od causes certain delays in the completion of work. However, PE firms are constantly collaborating with the authority to overcome these obstacles.

Opportunities and scope

Numerous opportunities exist in the National Monetisation Pipeline (NMP). The road sector accounts for 26-27 per cent of the more than $80 billion monetisation pipeline. In recent years, the bulk of projects have been awarded using either the HAM model or the EPC method. Since only a handful of build-operate-transfer (BOT) projects are being developed, there are limited opportunities for private players and the market to acquire them. Secondly, a number of developers who previously work­ed on developing their own assets and then selling them later to churn capital to build th­em again, are now setting up their own in­vest­ment vehicles.

NHAI is also working on its plan to construct around 27,000 km of roads, which includes a few existing functioning roads and a few routes that will be transferred back to NHAI. It is also anticipated that the most recent TOT bundles will prove to be an excellent pipeline.

Multiple developers are constructing roads and then selling them to investors, creating nu­merous opportunities in the HAM market. Many of them have begun constructing their investment vehicles, while others are still in the process of doing so. Bilateral deals on BOT may no longer exist. Future events could also inclu­de portfolio consolidation.

With its favourable demographics and stable democracy, India remains an attractive destination from a road sector standpoint. In addition to urbanisation, technological adoption has also been observed. While the traditional in­­­frastructure sector, such as roads, renewa­bles and transmission, remain of great importance, new-age infrastructure such as digital infrastructure continues to get significant at­t­ention, as there exist opportunities to be the first mover.

Based on a panel discussion among Abhimanyu Diwan, Vice-President, Macquarie Group, and Ankit Jain, Vice-President, M&A and Business Development, Cube Highways and Transportation Assets Advisors, at a recent Indian Infrastructure conference