Over the past few years, there has been significant development in India’s road infrastructure, with a continued focus on improving connectivity, establishing critical bridge and tunnel links, leveraging technology, promoting sustainable construction materials and enhancing road safety.
India is now surpassing several developing nations in deploying cutting-edge technologies and materials to enhance quality. This is a direct indication of how Indian roads, in the coming years, will be defined not merely by addressing connectivity gaps, but through strategic deployment of innovative solutions to create sustainable and secure infrastructure that aligns with technical specifications and established engineering protocols.
Fast-tracking road development
A priority sector for the centre, the road sector has witnessed ambitious highway construction targets to build a world-class network of expressways, speedy project awards and rapid execution to support these targets. This has further been supported by stakeholder-friendly policies. As of August 2024, the Ministry of Road Transport and Highways (MoRTH) has incurred a capital expenditure of about Rs 1.06 trillion, utilising around 39.13 per cent of the budgeted outlay, and 78.27 per cent of the capex under the Vote on Account provision for the first five months of 2024-25.
In 2023-24, highway construction reached 12,349 km, marking a notable 20 per cent increase over the previous year. Although the sector fell short of the annual target of 13,814 km due to a surge in commodity prices and pending appointed dates, the pace of construction reached 37 km per day.
In H1 2024-25, project awarding was hampered due to procedural delays in project cost approvals, restrictions related to election codes of conduct and transition issues with the ministry adopting the build, operate, transfer (BOT) toll model. Furthermore, the general elections diverted district authorities’ focus, impacting the construction pace. Due to this, prior to the general elections, the awarding activity deviated from its usual accelerated pace. Till June 2024, only around 95 km was awarded. However, to avoid missing targets, there was a strategic pivot towards rapid execution. During the same period, around 1,152 km was awarded and 2,961 km constructed. When compared to the corresponding period in the previous year, there has been a substantial decline of approximately 35 per cent in project awards.
This slowdown, coupled with other impediments to construction progress in the first quarter, necessitated a revision of annual targets. The adjusted award and construction targets are 12,931 km and 10,421 km respectively. However, with the general elections now over, a resurgence is expected for the overall activity in H2 2024-25. Project awards have already picked up in Q2, with overall stable construction.
While it is crucial to prioritise speedy road construction to expand the overall network, the government has also adopted a balanced approach that emphasises quality assurance. Furthermore, by prioritising the construction of safer and more resilient roads, the need for frequent road maintenance has been eliminated.
Favourable financier stance
After overcoming initial challenges, asset monetisation has emerged as a crucial strategy for generating fresh capital, owing to private sector interest in well-structured and viable road assets. With its impeccable track record so far, road asset monetisation has crossed Rs 1 trillion.
The sector’s financial landscape remains promising, with credit lending reaching approximately Rs 3 trillion as of March 2024. Investors and lenders have maintained a favourable disposition towards road projects and asset monetisation models such as toll, operate, transfer (TOT) and infrastructure investment trusts (InvITs). Moreover, InvITs have emerged as highly effective financing vehicles in the sector.
However, certain challenges continue to plague the sector. Mostly, lenders have been cautious towards BOT (toll) projects for which the traffic outflow cannot be determined. However, financiers with a bigger risk appetite have shown interest. This apart, BOT (toll) projects, in their revamped form, are yet to gain traction. While toll projects offer relatively lower investment risk with predictable traffic, the diversion risk remains unknown. In contrast, HAM projects entail inherent operations and maintenance (O&M) and execution risks. Additionally, other sector challenges such as delays in land acquisition continue to impact and hinder financial closures. Despite these challenges, the road sector is an attractive investment, with banks now more confident in funding road projects.
Robust investor sentiment drives acquisition activity
In the past 10 years (2014-24), till October 2024, over 100 deals (including asset sales) worth over Rs 1.7 trillion took place in the road sector. The year 2023 witnessed substantial capital mobilisation of approximately Rs 190 billion through TOT bundles 9, 11, 12, 13 and 14, marking a notable increase in the average transaction value. This upward trajectory continued into 2024, when in September 2024, the Highway Infrastructure Trust secured TOT bundle 16 for Rs 66.61 billion. Currently, four more bundles are under bidding, signalling sustained investor interest.
Companies have remained mostly muted from 2018 to 2021, owing to the increased role of private equity firms. However, they have made a wavering comeback in 2023 for acquiring TOT bundles. In recent quarters, InvITs have emerged as a dominant buyer class for road assets. In the January-March quarter of 2024, KKR’s InvIT acquired 12 assets from PNC Infratech for a value of around Rs 90 billion. Additionally, despite being associated with risks, investors are now showing interest in under-construction road assets, with the recent takeover of four such assets in Q1 of FY 2025.
Paving the road to resilience
The road sector has maintained its status as a priority sector for the government. Consistent with past trends, MoRTH’s budget outlay rose 2.80 per cent to Rs 2.78 trillion in 2024-25 (budget estimate) from Rs 2.7 trillion in 2023-24 (budget estimate). Furthermore, the allocation has grown at a CAGR of 22 per cent, following the launch of the Bharatmala Pariyojana. Given the current thrust on road development, fiscal and non-fiscal government support is expected to continue.
There has also been consistent uptake in the use of alternative sustainable materials. In a recent development, the ministry has mandated the use of waste material in hot mix bituminous wearing coat or top layer for service and slip roads along national highways. A wider adoption of the same is expected in the near future, owing to the current high material prices.
Now, with the conclusion of the electoral period, project awarding and execution are likely to gain momentum by Q3 2024-25, with the engineering, procurement and construction model to remain the primary mode of implementation. Further, in 2024-25, the ministry plans to operationalise the multimodal logistics park at Jogighopa and award seven additional projects. The MoRTH has also announced plans to operationalise around 100 wayside amenities and implement advanced technological solutions, including barrier-free tolling on highways with four or more lanes. Moreover, in the short term, the government intends to introduce a satellite-based toll collection system to replace the current one.
InvITs and TOT bundles are expected to play a bigger role in garnering private capital for highway development. The response to the National Highways Authority of India’s InvIT is testimony to the soaring investor confidence. With this, the asset monetisation target for 2024-25 has been kept at around Rs 540 billion. Of this target, Rs 80 billion is expected to come from project-based financing and Rs 460 billion from TOT and InvIT.
Digitalisation is a key trend, which will shape the future of the road sector. A few practices include the adoption of digital tools and technologies for O&M, the emergence of connected and autonomous vehicles, and road safety and construction technology.
With recent amendments to the model concession amendments for TOT bundles, road bundles are now even more lucrative for investors in the road sector. The MoRTH is also currently seeking cabinet approval for a Rs 22 trillion investment to accelerate development with the aim to construct 30,600 km of highways by end 2031-32, signalling a comprehensive approach for future road network expansion.
All in all, the confluence of policy and fiscal support, increasing investor interest, contractual reforms and technological advancements ensure a stable medium-term outlook for the sector. With this, the sector is bound to maintain its operational efficiency in the future.
Harman Mangat
