The National Highways Authority of India’s (NHAI) plan to augment its non-debt resources by transferring its operational projects on long-term lease basis to domestic and foreign “patient capital” investors has got off to a good start.
The National Highways Authority of India’s (NHAI) plan to augment its non-debt resources by transferring its operational projects on long-term lease basis to domestic and foreign “patient capital” investors has got off to a good start. As the NHAI offered the first bunch of nine highway projects, with a total length of 680 km, under the so-called toll-operate-transfer (TOT) model, Canada’s Brookfield and Australian firm Macquire have been among the four to place bids. Netherlands-based Roadis Transportation Holding — which has tied up with India’s quasi-sovereign National Investment and Infrastructure Fund — and IRB Infrastructure too have bid.While NHAI expects to raise about Rs 6,300 crore from the current lot of projects, rating agency Crisil said this would potentially be the single largest foreign investment in India’s road transportation sector with a ticket size of Rs 6,500-7,000 crore.
“This is India’s first foray into asset recycling. If it is successful in highways, other sectors like power, telecom, and oil and gas should follow suit. If that happens, it would unlock a huge capital base for financing newer infrastructure projects so critical for India,” NHAI’s member, finance, Rohit Kumar Singh told FE.“Bids have not been opened yet. Technical bids will be opened on Friday. After technical qualification assessment, financial bids will be opened in a week. Then we will know the quotes,” he said, when asked about the potential bid sizes.
The ministry of road transport and highways and NHAI would use the upfront receivables exclusively for funding construction of highways. Bidders will recoup their investments — and returns — by collecting toll over the lease tenure. These projects have been built by the government under the conventional engineering, procurement and construction model. Tolls are currently being collected by NHAI. In October last year NHAI invited bids for these projects. NHAI plans to lease out 75 operational projects, spanning 4,376 km, through the TOT route. Crisil estimates that NHAI can raise about Rs 60,000 crore over the next two to three years by monetising these 75 road stretches.
“Since these projects have limited implementation risk and largely stable cash flows, they are expected to offer a 12-13% internal rate of return, which is lower compared with the 16-18% generated in build-operate-transfer projects where the risks are also higher. But that is still considered good returns by owners of ‘patient capital’ such as sovereign wealth, pension and insurance funds,” Crisil added.
Asset recycling of this kind is going to be tested for the first time in India, although internationally there have been many precedents for this. The US, for example, did it during the subprime crisis of 2008 to bolster the cash flows to the exchequer; the practice is also prevalent in Australia. Sources said NHAI is likely to invite bids for the second bunch of projects involving five to six operational highways under the TOT model by next month.“Traditional domestic infrastructure developers with technical expertise have been chary of bidding because of the large upfront equity requirement. Foreign investors could tie up with such developers or with O&M (operation and maintenance) companies to leverage their expertise, which would make it a win-win,” Crisil wrote.