Traditionally, banks have been the conventional loan providers for road projects in India. Although banks play a pivotal role, particularly in the absence of a mature bond market and exposure limits imposed by regulators, relying solely on them has been viewed as a suboptimal solution. In view of this, there has been a long-standing need to expand funding avenues to finance the growing demand for road development.
Given the limited funding avenues available for infrastructure investment, the government has increased its budgetary allocations. The past three union budgets have demonstrated a strong commitment to augmenting investments in the infrastructure sector. The capex of Rs 10 trillion in 2023-24 represents a 33 per cent increase from the budgeted expenditure of Rs 7.5 trillion in 2022-23 and a twofold increase over the actual expenditure of Rs 4.26 trillion in 2020-21.
In recent years, the sector has been progressively transitioning from a constrained fiscal environment to a more flexible one. Alternative sources of funding, including external commercial borrowings, private equity, foreign direct investment (FDI), infrastructure investment trusts (InvITs) and asset monetisation via different routes, now constitute a larger part of the overall investment in road infrastructure.
Monetisation moves
The National Highways Authority of India (NHAI) monetises its assets under three different modes – toll-operate transfer (TOT), InvITs and project-based financing. As of March 2023, around Rs 263.66 billion has been raised through the TOT mode, around Rs 102 via InvIT and Rs 335.61 billion through the special purpose vehicle for the Delhi-Mumbai Expressway. As of August 2023, the authority is set to initiate the third phase of highway monetisation via its InvIT, the National Highways Infra Trust (NHIT). However, unlike previous rounds, this round will not involve public mobilisation of debt.
The overall monetisation target for 2023-24 is Rs 350 billion. This represents a 6.5 per cent increase in the target for 2022-23 (Rs 328.55 billion). Of this, around Rs 150 billion is expected to be raised through project-based financing, and Rs 100 billion each through the TOT and InvIT routes. The InvIT and TOT routes are gaining popularity among investors.
InvIT success
The monetisation of road assets has been successful in ensuring cash flows for new road projects. The sector has a total of 11 InvITs, the highest among infrastructure sectors. NHAI’s InvIT, NHIT, is the first InvIT floated by a public entity in the sector. The authority was successful in raising around Rs 102 billion through private placement of the InvIT units.
In the same month, the Highways Infrastructure Trust (HIT), an InvIT owned by KKR, successfully acquired four road assets from Macquarie India in a significant deal valued at Rs 30 billion. The acquisition included Gujarat Road and Infrastructure and Swarna Tollway, with each company holding ownership of two toll roads.
Prior to this, in June 2023, the National Investment and Infrastructure Fund (NIIF), India’s first sovereign wealth fund, announced plans to raise around Rs 20 billion ($244 million) for an InvIT. The investment, likely to be a private placement, will comprise a few assets from Athaang Infrastructure, which operates toll roads. Further, the Cube InvIT has been listed after raising around $630 million (Rs 52.28 billion) from the British Columbia Investment Management Corporation and Mubadala Investment Company.
Recently, as part of its debt resolution strategy, Infrastructure Leasing and Financial Services Limited completed the sale and transfer process of its fifth road asset, Pune Sholapur Road Development Company Limited, to Roadstar InvIT, at a cost of Rs 20 billion, bringing the total enterprise value of the InvIT to around Rs 73 billion.
In November 2022, the chairman of the Dadachanji group of companies had invested Rs 1.56 billion in the Shrem InvIT through a bulk purchase of 15 million units at Rs 104 per unit. However, in June 2023, the firm changed its financing plan to acquire two highway assets from Dilip Buildcon Limited, with the InvIT now raising Rs 10 billion ($122 million) in debt to finance the acquisitions, as compared to its original plan of using equity capital. The Shrem InvIT will now also issue non-convertible debentures to raise Rs 10 billion to acquire hybrid annuity model (HAM) assets, rather than assigning InvIT units as consideration for the transaction.
Overall, InvITs have been serving the dual purpose of accelerating the release of capital, while also allowing investors to invest directly and acquire partial ownership of assets. This is what has made these business trusts an even more attractive alternative option.
Acquisition activity
Over the past few years, assets in the road sector have gained significant investor interest. As per India Infrastructure Research, during 2016-23 (till September 2023), a total of 65 asset sales worth over Rs 1.2 trillion took place in the road sector. The average deal size rose sharply in the first half of 2022 owing to the award of TOT VII and TOT IX. The trend has continued in 2023, with the average deal value up by over 40 per cent in the first six months.
The primary motivation behind these transactions has been the developers’ need to unlock capital by monetising operational assets. The generated capital has been used to bid for new projects, reduce debt and improve liquidity.
Since their launch, InvITs have also emerged as an active buyer class. For instance, in 2022, IndInfravit Trust’s acquisition of five road projects worth Rs 96 billion from Brookfield increased the overall deal value. In June 2023, the trust acquired another four operating assets from Brookfield for around Rs 82.7 billion.
Furthermore, sovereign wealth funds and pension funds are bullish on the long-term growth prospects of the road sector. Some of the prominent active institutional investors are Cube Highways, Macquarie, NIIF, and Edelweiss. In addition, with the government permitting 100 per cent FDI, the investment environment has been ideal for foreign investors to capitalise on the sector’s growth.
Financial closures
Securing loans for public-private-partnership projects has always been a challenge for road developers. 
Further, since the Covid-19 pandemic, banks have been cautious towards lending to the infrastructure sector. Meanwhile, the overall scenario for obtaining funds for HAM projects has improved in recent years. As per India Infrastructure Research, in the past 15-18 months, around 20 HAM projects have achieved financial closure.
The way forward
To meet the growing demand for infrastructure investment, it is crucial to expand the long-term investment avenues in this sector. Establishing strict timelines for the settlement of termination payments is equally important to instill investor confidence.
Moreover, it is imperative for India to prioritise infrastructure creation by utilising risk management tools. The proactive adoption of surety bonds could be a crucial reform in this situation, as they can enhance liquidity in the sector by freeing up contractors’ working capital that is tied up in bank guarantees.
Two TOT bundles, TOT 14 and 15, have been identified for near-term roll-out and are viewed as lucrative investment opportunities. Recently, NHAI accepted the first insurance surety bond as bid security for TOT 14. With the proactive implementation of investor-friendly measures like these to promote ease of doing business in India, an increase in investment volumes is anticipated, particularly in the TOT space. Owing to its favourable demographics, India is well positioned to continue attracting private equity investments.
Harman Mangat
