Where is the Money?

Cover Story  /  Nov 2017

India's infrastructure spending will have to accelerate to at least Rs 50 lakh crore between fiscals 2018 and 2022 to make a visible impact on service delivery and provide a foundation for rapid and inclusive economic growth. Recent initiatives reaffirm the central government's strong commitment to infrastructure with public spending rising sharply in the fiscal years 2016 and 2017.

Policy actions to revive stalled projects, expedite approvals, introduce hybrid annuity and toll-operate-transfer (TOT) models in highways, and sustain rapid growth in renewable capacity augur well for the infrastructure financing landscape. The proposed Ujwal DISCOM Assurance Yojana (UDAY) backs the ambitious Saubhagya scheme that aims at universalising household access to electricity. However, a number of challenges remain that need decisive tackling.

A Speedy redressal of stressed assets and debt overhang will be crucial, as will be a comprehensive retooling of the public-private partnership framework. Cooperative federalism will be put to test as attempts are made to fix power distribution utilities and municipalities that curb scaling up of investments. Persistent and collaborative actions will help resolve these issues and create enabling conditions for a rapid, durable and inclusive infrastructure buildout. In this context, this story could not have been better timed!

Let us take a quick look at what kind of investment has already gone into this big bang sector. Infrastructure investment in India is estimated to have risen to Rs 37 lakh crore, or 5.6 per cent of the gross domestic product (GDP), between fiscals 2013 and 2017, marking a 56 per cent growth over the Rs 24 lakh crore spent in the preceding five years. In fiscals 2016 and 2017, higher central government spending partially offset a steep decline in private investments and deterioration in state government finances. Five sectors - power, roads, telecom, irrigation and railways - accounted for approximately 83 per cent of all such investments in the past decade.

Weak project preparation, poorly-structured contracts with inappropriate risk allocation, irrational bidding exuberance and overreliance on bank-led financing in the past have spawned the 'twin balance sheet problem' of deeply indebted developers and gargantuan stressed assets in banking. The takeover of distribution utility losses under the UDAY and the recent farm loan waivers have further strained state finances. As a result, investments by the private sector and states are likely to remain subdued in the near term.

Yet, CRISIL believes that spending on infrastructure needs to increase to approximately Rs 50 lakh crore over the next five fiscal years, up to 2022. This projection factors an average annual GDP growth of 7 per cent, infrastructure investments equal to approximately 5.5 per cent of GDP and a pickup in private sector investments after fiscal 2019.

Vivek Sharma, Senior Director and Anand Madhavan Director, Infrastructure & Public Finance, CRISIL Infrastructure Advisory see the power, transport and urban sectors accounting for 78 per cent of the overall infrastructure spending. Outlays of such magnitude require expeditious resolution of the problem of stressed assets in banking, front-ending the creation of bankable projects, comprehensive restructuring of public-private partnership (PPP) frameworks and deepening of the infrastructure financing ecosystem, which is of tremendous importance.

Funding options
Commercial bank financing has been the pillar of support for infrastructure growth for much of the last decade. Between fiscals 2008 and 2015, credit to the infrastructure sector rose from 8 per cent to 15.2 per cent, outpacing the overall banking sector credit growth. But the story has soured since, with the infrastructure sector (including telecom) accounting for nearly 33 per cent of all stressed loans by June 2016. Apart from mounting stressed assets, challenges such as sectoral concentration limits, where infrastructure had contributed to over 35 per cent of credit to industry by fiscal 2015, and asset-liability mismatch have meant that the net incremental bank lending to infrastructure has stalled since fiscal 2015.

Bank lending to infrastructure declined from 15.2 per cent in fiscal 2015 to 12.7 per cent in 2017. While examining credit risks arising from infrastructure, Reserve Bank of India's (RBI's) Financial Stability Report 2017 concluded after a sectoral credit stress test that shocks can materially impact bank profitability with the most severe shock - 15 per cent of restructured standard advances and 10 per cent of standard advances becoming non-performing assets and moving to loss category û wiping out recorded profits for the fiscal.

Since the scenario says it all, an important question hovers: Is the government running out of ideas to fund infrastructure projects?
Vinayak Chatterjee, Chairman, Feedback Infrastructure first cleared the air about the government's intentions by saying, 'There is no funding constraint for a proper pre-handled brownfield or greenfield project. The real issue is institutional capacity to move things at a pace.'

He then revealed the Pandora's box to IT readers. The first one constraint is budgetary provision and the second one is that the government has off-budget domestic institutions like provident funds, NBFCs, banks, external commercial borrowings (ECBs), mutual funds, insurance funds, capital/corporate bond markets, etc., which can be leveraged to their fullest. Due to the long-term funding requirement of infrastructure sector, it is best suited to be financed by institutional investors with matching long-term liabilities as well as risk appetite.

However, infrastructure credit in India is largely from banks and NBFCs, accounting for over Rs 16 trillion of credit.

Among NBFCs, infrastructure finance companies (IFCs) also play a major role in providing credit to infrastructure entities. They are dedicated to lending majorly with a stipulated minimum of 75 per cent of total assets to be deployed in infrastructure loans. According to Chatterjee, the other sources of debt funding are corporate bond markets, infrastructure debt funds (IDF), etc. Apart from these sources, funding of some infrastructure projects is also from multilateral agencies like World Bank (WB), International Finance Corporation (IFC), Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), etc. Road cess, coal cess and cess on petroleum products are also collected to invest in large infrastructure projects. What is more, since the government is the owner of high-valued public sector enterprises and large stretches of land, the options are all open. Add to the bucket, long-term institutional funders from abroad such as Brookfield, the Canadian Pension Fund as well as National Investment and Infrastructure Fund (NIIF).

Meanwhile, public sector banks have been the major sources of infrastructure project financing in India, accounting for over half of the credit to the sector by banks and IFCs.

The credit to infrastructure sector from banks has increased sharply from Rs 72 billion as of FY2000 to Rs 9.3 trillion as of FY2015. However, the outstanding bank credit to infrastructure has slowed down and declined in the last two years due to increasing non-performance assets (NPAs) and sector-specific constraints.

As banks have liabilities in the form of deposits, which are of short to medium tenure, they face risks of asset-liability mismatch by investing in infrastructure projects.

While banks have been the major source of providing infrastructure credit in India, Shubham Jain, Vice President and Sector Head, Corporate Ratings, ICRA Ltd is of the opinion that their capacity to continue to provide funds to meet the growing requirements of sector is constrained.

Government's public expenditure plan
NITI Aayog projects' private investment in infrastructure between fiscals 2013 and 2017 has grown by 44 per cent, from Rs 8.88 lakh crore to Rs 12.81 lakh crore. However, the actual figures are likely to be a tad lower, given the trends in other visible numbers such as bank lending to infrastructure which flatlined during this period. This alarming scenario indeed calls for an action, and how? The government has consistently increased public expenditure on infrastructure in order to boost employment and provide renewed impetus to economic growth. The Government of India's total expenditure this year has crossed Rs 11.47 lakh crore (up to September '17), out of the budgeted expenditure of Rs 21.46 lakh crore, showing an increase of Rs 1.2 lakh crore over last year.

The special thrust of this drive is on key development sectors, including rural roads, housing, railways, power, highways, ports, airports and digital infrastructure. The capex target of the Government of India for 2017û18 is Rs 3.09 lakh crore, which is 31.28 per cent higher than last year, out of which Rs 1.46 lakh crore has been spent on capital works till September 2017. In addition, Government of India had fixed a capital expenditure target for central public sector enterprises (CPSEs) for 2017û18 at Rs 3.85 lakh crore, out which capex spending of Rs 1.37 lakh crore has been achieved till September 2017.

Take the example of railways (turn to page no 46 to refer Railways: Is it on track?). A target of Rs 131,000 crore has been made for capex for the railways. Against this, an expenditure of Rs 50,762 crore has already been achieved. The main thrust is on upgrading the infrastructure to improve safety, laying of new lines and providing passenger amenities.

The following are the key among the capital works completed:


For power sector, under Pradhan Mantri Sahaj Bijli Har Ghar Yojana, universal electrification is being taken up to provide last mile connectivity and electricity connections to all remaining households that lack them in the country by March 2019. This is in addition to the ongoing scheme for rural electrification, the Deen Dayal Upadhay Gram Jyoti Yojana. The proposed outlay is Rs 16,320 crore, involving GoI support of Rs 12,319.50 crore.

To complete phases I and II of Pradhan Mantri Gram Sadak Yojana (PMGSY) for rural roads, the Government of India, along with the states, proposes to spend Rs 88,185 crore over three years starting 2017û18. This will result in the construction of 109,302 km of rural roads covering 36,434 habitations. In addition, projects worth Rs 11,725 crore, involving upgradation of 5,411 km of existing roads and construction of new roads in 44 left wing extremism (LWE) affected districts, will be completed by 2019-20.

That said, a roof for everyone is also planned by the government. Under the Housing for All 2022 scheme, about 2.2 crore families are to get their homes thus giving a big boost to the construction sector. Under the Pradhan Mantri Awas Yojana (Urban), or PMAY (U), 1.2 crore units will be built with an outlay of Rs 1.85 lakh crore over the next three years. Under PMAY (Gramin), 1.02 crore units will be built with an outlay of Rs 1.26 lakh crore by the centre and states by March 2019, of which 51 lakh units will be built this year.

Taking forward its commitment to providing more efficient transportation, the government has removed bottlenecks from the roads sector and significantly stepped up the highway development and road building programmes. To further optimise the efficiency of movement of goods and people across the country, the government is launching a new umbrella programme called Bharatmala. This road-building programme involves a capex of Rs 6.92 lakhs crore over the next five years for 83,677 km of roads.

When asked how such mega-scale projects are to be funded, Nitin Gadkari, Union Minister, Ministry of Road, Transport and Highways divulged that the government has many sources to fund all the envisaged infrastructure projects such as Bharatmala (roads) and Sagarmala (ports).

For Bharatmala, he says, 'We are planning to raise Rs 2.9 lakh crore from the equity market, Rs 1.06 lakh crore from private investments and Rs 2.19 lakh crore from central road funds or TOT or toll.'

He added,'Balance works of 48,877 km under other schemes, with an outlay of Rs 1.57 lakh crore, will also be undertaken in parallel by NHAI/MoRTH with Rs 0.97 lakh crore from CRF and Rs 0.59 lakh crore from gross budgetary support.'

Lastly, monetisation of 82 operating highways with investment potential of Rs 34,000 crore has been taken up with the first bundle of nine NH stretches of 680.64 km bid out with a monetisation value of Rs 6,258 crore.

Infrastructure development funds
With dedicated infrastructure lending, IFCs generally have sizeable liability in the form of long-term funds raised from the bond market, and hence are relatively more suited to match the long-term funding requirements of the infrastructure sector.

Nevertheless, with significant non-performing assets (NPAs), lenders are cautious of taking new exposure to the infrastructure sector. Therefore, alternative funding sources have to be developed or strengthened to meet the funding gap. This can come in the form of increased funding from pension and insurance funds, IDFs, infrastructure investment trusts (InvITs), ECBs and offshore rupee bonds through take-out financing, and development of corporate bond markets.

IDFs are either set up as a trust through the mutual fund route, regulated by the Securities and Exchange Board of India (SEBI), or as a non-banking financial company, called IDF-NBFCs, regulated by the RBI. The seven IDFs set up till date have seen their portfolios grow multi-fold to around Rs 13,000 crore as on March 31, 2017, despite the challenges faced in convincing lenders to refinance operational projects. Similarly, infrastructure developers have benefited from access to low-cost, long-term funds through innovative structures, thereby improving the credit quality of projects.

The government's continued focus on infrastructure development and the availability of a large pool of bank loans for operational projects imply that the prospects for IDF-NBFCs are strong. Also, the portfolios of IDF-NBFCs are expected to sustain their credit quality with stringent underwriting standards and diversification, although the business model stability with the recent diversifications is yet to be fully tested. Nevertheless, IDFs are expected to continue to play a vital role in enabling flow of credit to the infrastructure sector.

At the outset, Karunakaran Ramchand, Managing Director, IL&FS Transportation Network Ltd believes that public-private partnerships (PPPs) present the most suitable option for bridging the infrastructure gap. He said, 'Developers and investors are focusing on IDFs and InvITs now. We should also explore measures like 'land value capture mechanisms,' since it is natural that development of transport infrastructure will add value to land and real estate.'

Citing an example, Ramchand mentioned how in China many cities have financed half or more of their urban infrastructure investment directly from land leasing.

'Considering the current scenario, government could evaluate issuing default guarantees to allow private promoters to access commercial loans to enhance the creditworthiness of the operation.' 'These kinds of financial instruments will improve the ability of the developer to honour debt servicing during the ramp up phase of the project, when the risk of default is highest during the early years of a project life cycle,' he concluded.

Meanwhile, other than these instruments, the state government can also enjoy the liberty of raising funds through multilateral funding agencies. Importantly, the state government does not require permissions from the central government. And, this has certainly benefitted states like Maharashtra.

While states will furnish guarantee for such loans, the centre will provide counter guarantee. Such direct borrowings by state entities would not be counted in the calculation of their respective fiscal deficits, under the states' Fiscal Responsibility and Budget Management (FRBM) laws. The intention of allowing direct funding for big projects was that the budgets of states are under pressure to provide funds for welfare and other schemes. As of now, the international funding gets counted in their FRBM and they cannot take extra funds for infrastructure projects. However, with the new initiative, states will directly get money for infrastructure projects and it will not be counted in their FRBM limits.

According to Sunil Srivastava, Managing Director, BARSYL, 'The success of all these instruments introduced by the government can only be seen in the coming months when the funds are deployed in sound projects and so generate returns. It is rather difficult to comment on this at this particular juncture, since the infrastructure sector itself has still to pick up steam.'

Speaking to IT on the sidelines of Green Build India, Maharashtra Chief Minister, Devendra Fadnavis told that for all metro line and Mumbai trans-harbour link projects, the government has secured all necessary funds from Japan International Cooperation Agency (JICA). He also mentioned that for city-wise infrastructure projects, Mumbai Metropolitan Regional Development Authority (MMRDA) is capable of raising funds through the land bank owned by them.

While MMRDA has land bank to its rescue, what plans does Municipal Corporation of Greater Mumbai has in place? IT ran into Ajoy Mehta, Municipal Commissioner, at an exhibition. Although he did not have much to offer, he said, 'We have our own sources like property tax, water tax etc., to support envisaged projects.'

An innovative example is taking shape in the state of Kerala. As per media reports, the government is tapping expats to mop up Rs 10,000 crore to fund two highways: the 1,267 km long hill highway and the 630 km long coastal highway. In fact, Kerala has been able to tap into the non-resident pool effectively to create infrastructure like hospitals, convention centres, airports etc.

InvIT - The new normal
Recently, the country witnessed two InvIT funds: one by IRB and two by IndiGrid, power sector's first. IRB raised Rs 5,035 crore through InvIT as a part of this first public offering, which includes a base issue of Rs 4,300 crore, offers for sale (OFS) and oversubscription.

As far as InvIT funds are concerned, it would definitely be a boost to IRB, because the overall (debt) burden for the company will come down. It will rerate the company's consolidated trade debt, which will help reduce the cost of the debt burden. After transactions, with Rs 1,700 crore of cash coming into IRB, the overall net debt-to-equity ratio of the company will improve from 3:0 to 1.8:1. This will help IRB improve its consolidated ratings and in turn will help reduce the interest cost on other projects in its portfolio.

IRB can deploy the cash received from the trust in building projects with project IRR (internal rate of return) of 14 to 15 per cent, and then offer those projects to the trust at 11 to 11.5 per cent discounted cash flow, thus creating value for IRB shareholders as well.

During the IPO, Virendra Mhaiskar, Chairman and Managing Director, IRB said that the company - with a strong execution track record - will bid for new project IRR of 14 to 15 per cent and also realise the construction margin. Once the project cash flow stabilises, the trust can enjoy stable and strong yields on these operational projects for its unit holders.

As far as success of this fund is concerned, recently IRB InvIT Fund announced robust Q2 FY18 results. It declared distribution of cash flow of Rs 174 crore to its unit holders at Rs 3.00 per unit.

Meanwhile, IndiGrid, India's first InvIT in the power sector, has approved the acquisition of three power transmission assets from its sponsor, Sterlite Power Grid Ventures Ltd, at a value of Rs 14.9 billion. These acquisitions result in a 40 per cent increase in assets under management (AUM), from Rs 38 billion to Rs 53 billion. The three assets consist of five transmission lines aggregating 1,425 circuit km thus increasing the total portfolio to 13 transmission lines and two substations across eight states.

These inter-state assets were awarded on perpetual basis on a build, own, operate and maintain model through competitive bidding. They have a long residual contractual life of about 34 years and operate under the point of connection mechanism in India, thereby significantly reducing the risk of revenues.

Pratik Agarwal, Chief Executive Officer, IndiGrid, said, 'These three acquisitions reaffirm our strong commitment to growing the IndiGrid platform through accretive transactions of operational power transmission assets, which have long-term cash flows and low counterparty risks. We will continue to pursue all such growth opportunities, including third party assets.'

To conclude, when this government took over in 2014, the entire infrastructure sector was derailed. The present government was clear in adopting and implementing certain strategic moves. One of them was increasing public expenditure through public sector entities. To some extent, the government has tasted success in sectors like road and highways, renewable (wind and solar), inland waterways, irrigation, railways, urban metro and urban infra projects.

The strategy was correct...the expectation was that while this strategy took its own course, the government also took corrective and calculative measures to revive PPP. However, although the strategic intent of pushing public expenditure has succeeded, it has not made thumping impression for the shortfall of lack of PPP. Lastly, the government has not acted upon Kelkar Committee suggestions for reviving PPP. Because if they do, the PPP mode will rise from the ashes and certainly, private companies reeling under debt will have better bottom line to post.

Railways: Is it on track?
The earnings of Indian Railways have been increasing steadily over the past few years to reach an estimated Rs 176,000 crore in fiscal 2017, which is a compound annual growth rate (CAGR) of ~7 per cent between fiscals 2014 and 2017. However, an alarmingly high operating ratio of 96.9 per cent in fiscal 2017 remains a cause of concern, which needs to be addressed.

Given the increased capex plans, this needs to be supported by commensurate financing plans. The Indian Railways is primarily financed through (i) gross budgetary support (GBS) from the central government, (ii) its own internal resources, such as freight and passenger revenue, leasing of railway land, etc., and (iii) extra budgetary resources, such as market borrowings, institutional financing, PPPs, JVs, etc. To keep pace with the higher capex plan, the budget for the last three years had increased the plan outlay of the railways from Rs 1.2 trillion for FY2017 to Rs 1.31 trillion for FY2018 and from Rs 0.67 trillion outlay during FY2015 to Rs 1 trillion for FY2016, where the actual is estimated at Rs 0.85 trillion). Most of the extra-budgetary resources comes in the form of market borrowings from the Indian Railways Finance Corporation (IRFC). Indian Railways has also received commitment from LIC for funding of Rs 1.5 trillion in tranches over five years.

In the first two years of the five-year plan, that is, in fiscals 2016 and 2017, a total investment of Rs 2.14 lakh crore has been made, which corresponds to 25 per cent of the total envisaged amount. Considering the current pace of investment, the railways will likely miss the target of Rs 8.56 lakh crore investments. A look at the current status of investments across focus areas shows that investments in rolling stock are on track at 40 per cent. Network decongestion and developmental projects, in general, also appear to get funds.

Potential opportunities
The railways is slowly opening up for private players with newer models and modes of development. Recently, there have been attempts across business segments to increase private sector participation.

Station redevelopment projects For investment in station redevelopment, the railways has identified 400 stations across 100 cities covering approximately 2,700 acre. Various modes for selection of developers have been identified. The Indian Railway Station Development Corporation (IRSDC), a joint venture between IRCON International and Rail Land Development Authority, has been formed as a special purpose vehicle to redevelop existing stations.

Rolling stock
The Integral Coach Factory in Chennai recently rolled out two nearly indigenous (~100 per cent production of all components in India) Linke-Hofmann-Busch, or LHB, coaches. In 2017, the Ministry of Railways signed an MoU with the Federal Department of Environment, Transport and Communications of the Swiss Confederation, for technical cooperation, which could see the introduction of tilting trains in India.

Last mile connectivity projects
To build better confidence in PPP projects, the railways looks to partner with the state governments and other stakeholders to get connectivity projects (such as to coal mines) to take off. Recent developments on this score include approvals under the joint venture model to develop rail connectivity to three ports in Maharashtra û Jaigarh, at a cost of Rs 771 crore, Rewas, at Rs 349 crore, and Dighi, at Rs 724 crore - the implementation of which is going on. The 540 km SonnagarûDankuni section of Eastern Dedicated Rail Freight Corridor is to be implemented on PPP mode. In addition, a large quantum of ancillary infrastructure is also expected to come up around the corridor, again on PPP mode.

Challenges
Backlog in safety-related infrastructure is one of the biggest challenges facing Indian Railways, and those in track renewals are necessary to ensure safety. Out of 64,000 km of tracks, over 7,000 km are more than 30 years old and need immediate replacement.

In addition, over 4,000 unmanned rail crossings need to be eliminated. Years of under investment has only exacerbated the situation, which needs to be tackled on a war footing now.

Innovative financing
To finance projects capable of servicing debt, we need to explore funding from sovereign wealth funds, and insurance and pension funds, and continue to source from multilaterals such as Asian Development Bank and World Bank. Another option to explore is some of the new financial instruments such as masala bonds. In the recent past, government-owned entities such as the National Thermal Power Corporation and the National Highways Authority of India have been highly successful in raising debt from international markets at highly competitive rates.

Aviation: Still grounded
The International Air Transport Association (IATA) expects India to displace the UK as the third largest aviation market (international and domestic traffic combined) to reach 278 million passengers by 2026. Also, as per IATA, the five fastest-growing markets in terms of additional passengers per year over the forecast period would be China, the US, India, Indonesia and Vietnam.

With the development of regional airports, reduced ticket prices and operationalisation of the UDAN scheme, air traffic in the country can potentially sustain and exceed the current 15 per cent growth rate in the short to medium term. Out of the six major airports, those in South India are already operating above peak capacity, while Mumbai and Delhi are nearing peak capacity. Projects adding around 155 million passengers per annum capacity, including 10 million passengers at the Navi Mumbai airport, are expected to come up across six major airports.

Under the UDAN scheme launched in April 2017, an additional 100 airports would be operationalised over the next few years. The Airport Authority of India (AAI) envisages investments of Rs 17,500 crore in upgrading airport infrastructure till fiscal 2020. As AK Pathak, ED-Planning, AAI informs IT 'A total of Rs 21,946 crore has been planned for airport infrastructure till 2021-22.' Most of this investment will be used for improving facilities at non-major airports.

National Civil Aviation Policy (NCAP) is working to make unserved and underserved airport routes as pivots in the regional connectivity scheme (RCS). However, the selection of cities under RCS is 'demand-driven,' depending on firm demand from airline operators, and where the state government agrees to provide various concessions envisaged in the policy. There are approximately 16 underserved and 394 unserved airports and airstrips in India. The policy further states that no-frills airports shall be developed at an indicative cost of Rs 50 to 100 crore without focusing on financial viability.

Target
The government aims to double the number of functional airports from 75 to 150 in the next two or three years to serve the largely untapped domestic aviation sector. To achieve this target, the government has launched the UDAN scheme under which unserved and underserved airports in small cities will be made operational with regular flights and subsidised fares so as to increase traffic. Hence, adopting a long-term strategy with phased implementation targets and stronger regulatory framework will ensure that there is a balance between commercial and national interests. This is of paramount importance, especially since a forward-looking national policy is already in place. This will not only aid in sustaining current growth, but also ensure that India is able to emerge as the third largest aviation market, surpassing the UK in the next decade.

Roads and highways: Improved valuation
The sector was plagued with a large number of stalled projects in fiscals 2013 and 2014. Over 400 projects with investments of Rs 300,000 crore had halted for various reasons, such as land acquisition and delays in financial closure. Through a series of measures, The Ministry of Road Transport and Highways managed to either revive or terminate these projects in a meaningful manner. Currently, the roads and highways sector, among all infrastructure sectors, has the least amount of nonperforming assets (NPAs) and stalled projects. Some of the recent policy initiatives undertaken by the NHAI and MoRTH in this regard are:

Premium deferment: Concessionaire allowed to restructure the premiums committed once through the life of concession.
100 per cent equity disinvestment: Concessionaire allowed 100 per cent equity divestment after two years of construction completion for all BOT projects, irrespective of the year of award.
Harmonious substitution: Substitution allowed for existing concessionaires in BOT projects.
One-time fund infusion: Financial assistance in the form of loan from NHAI for languishing BOT projects.
Rationalised compensation: Extension of concession period /compensatory annuities for projects languishing due to reasons not attributable to concessionaire. Securitisation of BOT projects: Concessionaires can raise subordinate debt on the strength of future surplus cash flows of operational BOT projects.
Release of 75 per cent arbitral award: Release of 75 per cent of arbitral award against bank guarantee.

Meanwhile, asset sales in the road sector have picked up over the last 30 months with relaxation in exit policy. Sponsors in around 20 road assets involving a total cost of Rs 123.27 billion have monetised their assets as opposed to around Rs 70 billion in the preceding 50 months. Three out of the 20 are state road projects and the remaining are national highway (NH) projects. Out of the 17 NH projects, 16 were awarded before 2009 and are direct beneficiaries of the May 2015 policy decision on relaxation of the exit policy for projects awarded before 2009.

In about 31 per cent of the transactions, the return to the developer is negative, indicating loss on investment. Developers with a weak credit profile disposed their assets at a loss as liquidity took precedence over profit-making for them. The ones with the highest returns were secondary sale transactions, wherein the sponsors are private equity investors. As the valuations have improved, following a favourable outlook on toll collections and decline in interest rates, asset sale transactions are expected to gather further momentum.

Projects with at least five to seven years of operational track record provide more comfort as the base traffic, growth rates and expenditures pertaining to regular or periodic maintenance would have been established. Further, issues related to user acceptability of toll rate revisions and toll leakages (if any) are also addressed. M&A opportunities in the road sector are the highest among various infrastructure sub-sectors with around 88 operational NH projects, totalling 7,192 km, with a total project cost of Rs 693.27 billion and median operational track record of four years.

The TOT mode
In August 2016, the Cabinet Committee on Economic Affair (CCEA) had authorised the NHAI to monetise public-funded NH projects, which are operational and have been generating toll revenues for at least two years after the commercial operations date (COD) through the toll-operate-transfer (TOT) model. Seventy-five operational national highway projects totalling 4,376 km completed under public funding have been preliminarily identified for potential monetisation, using the TOT model. According to ICRA estimates, the total value of the 75 projects proposed to be awarded through the TOT is estimated at Rs 356 billion.

For these 75 projects, the median vintage in terms of toll collection track record stood at 5.22 years. Out of these, nearly 26 projects (35 per cent of total) are on the BOT (annuity) basis and the remaining 65 per cent have been implemented on an EPC basis. Of the portfolio, 25 projects (33 per cent) are part of the Golden Quadrilateral (GQ), which experiences high traffic density. The average toll collection in GQ per day is Rs 1.6 million, whereas in non-GQ stretches it is Rs 0.7 million per day.

The operational nature of these assets eliminates execution risk and the traffic risk is relatively lower when compared to greenfield projects as the base traffic and growth trends are established for a majority of the stretches. Nonetheless, projecting traffic growth for a 30-year period will be challenging. Given the long concession period, there could be a requirement for capacity augmentation (lane upgrades). While there is no obligation on the TOT concessionaire to take up augmentation û the NHAI can employ a third party contractor for lane upgrades. However, the O&M and tolling obligation rest with the TOT concessionaire. In the absence of long tenure debt, equivalent to 75 to 80 per cent of the concession fee, the TOT projects would require refinancing at a later stage. Further, forecasting traffic for a 30 year period is extremely challenging, given the dynamic nature of the road network with many state highways getting upgraded to national highways on a regular basis. For many non-BOT stretches which were irregularly maintained in the past, the major maintenance requirement could be significantly higher once the TOT concessionaire takes over the project. Hence, there is a possibility of dispute on quality-related issues.

Also, given that the TOT concessionaires are expected to absorb at least 20 per cent loss in toll collections without compensation, the bidders may factor this in their bid concession fee. This, along with the discounting rate of 9.25 per cent for arriving at the IECV, may result in bidders quoting cautiously to start with.

- Rahul kamat