Recycling Capital: Experience, progress and potential of InvITs in the road sector

In India, between the late 1990s and early 2000s, the engineering, procurement and construction (EPC)-led model ceded way for the build, operate, transfer (BOT) annuity mo­del, with the BOT-toll model following suit. This spawned a new set of Indian investors, who redirected their focus from pure construction companies to road developers. However, when the model appeared to provide moderate marginal returns, it inspired the creation of the hybrid annuity model (HAM).

Nevertheless, the capital infused by the BOT developer community was not being adequately recycled due to which the concessions lasted several years. As a result, the opportunity to re-invest capital was dwindling. This led to the creation of infrastructure investment trusts (InvITs).

The InvIT model serves the dual purpose of accelerating the release of capital, which can then be re-invested in additional road projects while also allowing investors to invest directly in infrastructure projects and acquire partial ownership. For instance, the National Highways Infra Trust (NHIT) presents an investment opportunity for institutional and financial investors such as mutual funds, provident funds and pension funds that were previously unable to invest directly in infrastructure assets and had only limited exposure in the form of equity stake.

Thus, InvITs spur infrastructure creation by providing an efficient way to raise capital from investors (individual and institutional investors) and fund new project development. At a recent India Infrastructure conference, Anurag V. Jain, chief investment officer (CIO), National High­ways Infra Trust, shared his views on the experience so far, recent developments and future prospects for InvITs…

National Highways Infra Trust

NHIT, set up by the National Highways Authority of India (NHAI) in 2020, is the principal vehicle proposed for the monetisation of road assets un­der the National Monetisation Programme (NMP).­ Operational for almost two years now with an enterprise value of Rs 117 billion, the instrument’s debt-to-equity ratio is 0.27, with the debt service coverage ratio (DSCR) being 5.28. National Highways InvIT Project Mana­gers Private Limited (NHIPMPL), a wholly ow­ned subsidiary of NHAI, is the project manager for the InvIT.

The InvIT has had a successful closure of two rounds of asset acquisition from NHAI, with the current portfolio spanning around 636 km. NHAI participated in both rounds of fund-raising and currently holds approximately a 15 per cent stake in the InvIT.

It has a diversified investor base including domestic provident and pension fund trusts, insurance companies, mutual funds, banks and individuals. Additionally, the CPP Invest­ment Board and the Ontario Teachers’ Pension Plan Board (OTPP) hold a 25 per cent stake each. It has also received strong participation for both units and non-convertible debentures (NCDs) in the past. Moreover, NHAI’s InvIT provides an opportunity to participate in a collaboration between a sovereign sponsor, professional management and marquee investors.

In the first round, the InvIT mobilised aro­und Rs 80 billion, following which it mobilised around Rs 37 billion in the second round from the market.

Concession agreement

The NHAI InvIT has a robust concession agreement, based on toll-operate-transfer (TOT) concessions, to align the interest of all stakeholders. It provides a concession period of 30 years which helps mitigate revenue risks and en­ables potential upsides through efficient capital structuring (debt refinancing, longer ten­ures), has a well-defined termination payment mechanism, has no construction risk as capacity augmentation is undertaken by the au­thority, and a performance-linked adjustment mechanism if the target revenue is mis­sed or exceeded by an agreed percentage.

Success enablers

Governance is synonymous with InvITs. For investors with a medium- to long-term horizon, exemplary governance is necessary to ensure ethical practices. This market demand has prompted NHAI to establish a market-accepted governance structure. Almost half of the NHAI InvIT board consists of independent directors, limiting the ability of any single party to control board decisions. Moreover, due to applicable policies and regulations, sponsors are not permitted to participate in decision-making when a transaction involves them.

InvITs require many checks and balances before they can succeed. From an investor stan­dpoint, once this pooled investment vehicle is established in the market, raising capital be­comes relatively easier. For instance, the NHAI sponsored InvIT, in October 2022, raised a sum of around Rs 15 billion from domestic and international investors through placement of non-convertible debentures (NCDs), for part funding its acquisition of three additional road projects from NHAI. The NCDs were placed at a coupon rate of 7.90 per cent payable semi-annually and an effective yield of 8.05 per cent per annum for NCD holders in all categories, with maturity for the next 24 years (2045). The bond was fully subscribed across different categories including institutional investors, corporate bodies and high net-worth individuals (HNIs). Addi­tionally, the bond garnered a substantial am­ount of retail participation. It was oversubs­cribed seven times.

While the operating business model helps provide stable, predictable, and relatively low-risk cash flows similar to debt, there is growth potential like equity because the returns are not fixed with a scope of change in the unit price. India has had a few road sector InvITs such as the IRB InvIT, IndInfravit Trust, Cube Highways InvIT and Shrem InvIT. However, with the ability to create a virtuous cycle of infrastructure development, the product has evolved over time.

The road sector is a defined concession bu­siness, unlike real estate, making growth visibility a crucial factor for investors considering InvIT investments. For example, if a developer has a 20-year concession, cash flows will dwindle to zero when the period terminates. Con­sequently, any InvIT investor seeks visibility in growth well beyond the concession period. This visibility is only achievable via the acquisition of new assets, continuous bidding and a clear growth strategy.

NHAI’s game plan

The focus of the NHAI InvIT has been on significant economic corridors in India, with geogra­phic diversification. It focuses on corridors that may lead to economic development for the po­rt­folio. The portfolio has the highest share (len­gth-wise) of 35 per cent in Madhya Pra­de­sh, followed by Rajasthan, Uttar Pradesh, Ass­am, Karnataka, Telangana, West Bengal, Guja­rat and Maharashtra.

The NHAI InvIT caters to critical economic corridors such as national highway (NH) 27 which is the east-west corridor, spanning 3,507 km from Porbandar to Silchar; north-south corridor (NH 44) spanning 4,112 km from Sri­na­gar to Kanyakumari; NH 48, spanning 2,807 km from Delhi to Chennai, part of the Golden Quadrilateral; and which caters to the north-south movements.

For round three, NHAI has been considering projects in the Northeast region. Assam ap­pears to be a strong fit for the strategy, as private players have not been particularly active in the region and it offers a high growth potential.