In October 2021, the National Highways Authority of India (NHAI) sponsored its first infrastructure investment trust (InvIT), the National Highways Infra Trust (NHAI InvIT), to monetise completed national highways.
The NHAI InvIT raised funds through private placement, with the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan Board each subscribing to 25% of the units. The remaining units were issued to domestic institutional investors. Based on a portfolio of five roads, the NHAI InvIT’s initial enterprise value was INR80 billion (USD1.03 billion). Of this, INR20 billion was to be funded through debt. The units have since been listed on the National Stock Exchange and Bombay Stock Exchange.
In her 2022-2023 budget speech, the finance minister stated that in the road transport sector, the government intended to raise INR200 billion in that financial year through innovative ways of financing. This is likely to be achieved through a combination of the NHAI InvIT and the toll, operate and transfer (ToT) model, where private players collect and keep operational highway project toll fees over 20 to 30 years in consideration for an upfront payment, that is a concession fee.
The ToT model predates the NHAI InvIT and has been used by the government since 2018, when the Macquarie Group successfully bid for bundle 1 of nine highway projects, paying approximately INR97 billion. Since then, bundles 3 and 5 have been awarded to Cube Highways, and Adani and DP Jain respectively, with bundles 2 and 4 either cancelled or voided. Reports suggest that bundles 6 and 8 have been cancelled, while bids for bundles 7, 9 and 10 are underway.
India’s infrastructure sector is a key driver of the economy, and public-private partnerships enable the expertise of the private sector players to operate the projects efficiently. Public-private partnerships also reduce the monetary burden on the government. Both the NHAI InvIT and the ToT model are ways of reducing government debt while allowing the government to retain ownership of highway projects. Marquee institutional investors have shown interest in such partnerships and have participated in the government’s monetisation efforts.
The public-private partnership model is attractive to investors, allowing them to monetise completed and revenue-generating projects without having to bear the risks associated with construction projects. CRISIL calculates that 65% of 25,000 kilometres of highway have experienced over 15% toll collection growth since beginning operation.
The NHAI InvIT is regulated by the Securities and Exchange Board of India and its regulations. This provides investors with greater comfort, especially when assets, that is the roads, satisfy requirements of an “eligible infrastructure project”, allowing unit holders to receive at least 90% of the net distributable cash flows, thus ensuring steady returns. As the units of NHAI InvIT are listed, investors are better able to liquidate their investments.
On the other hand, investors need to consider that, to qualify as eligible infrastructure projects, roads only need to have been generating revenue for one year. The CRISIL report suggests that almost half of the 25,000 kilometres of highway examined are less than five years old. This means that many road projects may not have stabilised operations. In addition, profitability is contingent on two factors. The first is the level of tolls that operators can charge road users and the second is the number of users accessing the roads. Should there be any government interference or adverse external factors such as covid-19 and strikes, revenue may fall.
Despite the units of NHAI InvIT being listed, so far they have not been frequently traded and backers should be prepared to stay invested for longer to see returns on their investments. Investors should take advantage of opportunities such as making pre-bid enquiries and noting amendments to the documentation being executed with the NHAI to ensure that their risks are minimised and their rights remain protected.
At present, the innovative financing platforms offered by NHAI seem to be a win-win situation for both investors and the NHAI. If all goes well, these models are likely to increase exponentially in the coming years.
Vandana Pai is a partner and head of the investment funds practice, and Ayush Jain is a senior associate at Bharucha & Partners.
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