For monetisation to be attractive, the underlying assets have to be intrinsically good.

Akshay Purkayastha

- Director-Transport & Logistics, CRISIL Infrastructure Advisory

To achieve the ambitious roads and highways development programme, an optimum mix of awards, i.e. combination of HAM, EPC and BOT-toll, is necessary to ensure that risk is adequately divided between the government and private players, and to attract higher investment and participation,” says Akshay Purkayastha, Director-Transport & Logistics, CRISIL Infrastructure Advisory. Excerpts from the industry…

What has been the performance of the roads and highways sector in the year gone by, and what is your outlook for FY 2022?

The roads and highways sector has recovered much faster than anticipated. Toll collections have surpassed pre-Covid-19 levels now and there venue decline of large road engineering, procurement, and construction (EPC) companies may also be limited this fiscal. The two key performance indicators -length of road project awarded and constructed - are encouraging.

Up to December 31, 2020, ~2,300 km projects were awarded by the National Highways Authority of India (NHAI) versus ~1,700 km in the same period last fiscal. Total awards this fiscal should be 4,000+ km versus a target of 4,500 km. Last fiscal, ~3,200 km were awarded.

Also, the Ministry of Road Transport & Highways (MoRTH) has declared that over 7,500 km of highway projects have been awarded till January 15, 2021,versus 3,474 km same period last fiscal. Also, 8,000+ km of national highways were constructed by January 15, up 8% on-year.

The current construction pace means the fiscal 2019 record of 29 km per day could be beaten despite the pandemic challenges, and the annual target of 11,000 km by March 31, 2021.

We expect the growth trajectory in awards and construction to sustain next fiscal, taking into account the introduction of investor-friendly changes in the model concession agreement (MCA) for highway building under the hybrid annuity model (HAM) and build-operate-transfer (BOT)-toll model, and the government's push for greenfield corridors and expressways.

How do you assess the impact of the liquidity boosting measures by the government of India on the sector so far? 

In a pandemic-afflicted environment, the Centre had initiated various liquidity boosting measures for the infrastructure sector such as:

- simplification of payment structures for ongoing projects to monthly from milestone basis

- easing of the compliance and project execution burden of infrastructure companies by extending construction timelines and temporarily exempting them from regulatory actions, such as fines / appropriation of bank guarantees, etc

- relaxation of earnest money deposit and reduction in performance security on government / public sector tenders to 3% from 5-10% till December 31, 2021

- allowing bid securing declaration instead of bid security

- through the Reserve Bank of India and banking sector, easing of the debt repayment burden of the infrastructure sector (e.g., temporarily suspending the Insolvency & Bankruptcy Code 2016 law till March 31, 2021)

- (vi) infusing equity of Rs 6,000 crore in the National Investment and Infrastructure Fund to ease infrastructure financing and trigger infrastructure development.

While these measures have had a positive impact on the sector, it is crucial that the quality of projects do not get compromised because of the reduced guarantees.

Post gradual opening-up, what are the funding challenges and what needs to be done on a war footing to attract investment?

MoRTH and NHAI have made various investor-friendly changes in the MCA under the HAM, toll operate transfer (TOT), and BOT-toll models. These have had a positive impact on investor interest, as can be seen from the fact that TOT bundles 5a and 5B saw as high as six bids.

One of the major challenges, though, has been attracting private interest for investment in Greenfield assets, and private players' appetite to handle a higher risk portfolio. Here, reviving of the BOT-toll model is a welcome step, if the government is to lower its funding commitment. Another important step is to target a better mix of EPC, HAM and BOT projects in the next fiscal.

From a private sector funding challenge perspective, one is cautiously optimistic. During the fiscal, we have seen financial closure of big projects such as TOT bundle 3, and have also seen secondary market transactions - not only in highways, but in airports and ports as well.

But given the timeline of award of HAM projects, the next 3-6 months will be important.

How do you look at the asset monetisation scenario? What are the prerequisites for attracting the investors?

NHAI has huge financing needs, and had planned to raise ~Rs 85,000 crore till fiscal 2025 by monetising ~6,000 km of operational public-funded toll roads via the TOT and infrastructure investment trust (InvIT) routes.

Since 2017, NHAI has been deploying the TOT model for asset monetisation, having raised ~Rs 15,000 crore from TOT bundles 1 and 3. TOT bundle 3 achieved financial closure during the pandemic, and in January 2021, bundles 5a and 5b attracted six bids.

However, InvIT is still at a nascent stage, though relaxation of regulations such as leverage norms by the Securities and Exchange Board of India has helped. Starting with the IRB Infrastructure Developers public InvIT in 2017, the InvIT model has gained traction, with five deals materialising in the roads and highways sector. NHAI has also been working to monetise its operational national highways projects via an InvIT. As per a recent statement by a senior official in NHAI, the InvIT could be operationalised by March 2021. This will be India's first government-sponsored InvIT.

For monetisation to be attractive, the underlying assets have to be intrinsically good - should have good growth prospects backed by data and pricing should be attractive. In addition, robust management and strong governance is essential to attract investors, particularly in InvITs.

What is the impact of increasing debt for NHAI on projects awards and execution?

NHAI's ability to raise debt has not been impaired till now. In fact, NHAI has been helped by various initiatives, such as adoption of FASTag, which will lead to improvement in toll cash flow, and asset monetisation. Also, many NHAI initiatives, such as Greenfield expressway development, which are responsible for increasing NHAI's debt pile, will, in 4-5 years, start generating high toll revenue. Hence, from the perspective of debt management, the next 4-5 years are crucial.

But, though the increasing debt burden has not been a constraint on project awards and execution till now, the total debt will need to be monitored, nonetheless. Also, while there is no dearth of bank credit for good projects, banks are turning conservative in lending to private players in the roads and highways sector.

What is your take on the government's move encouraging the financial institutions as eligible bidders and scaling down the bidding criteria?

Encouraging financial institutions (FIs) as eligible bidders is a welcome step towards attracting private investment. FIs fulfil the financial net worth criteria for qualification, and provide flexibility to developer partnerswho are technically eligible to implement projects. Key advantages include: (i) cash-rich FIs are able to offer competitive, yet bankable bids; (ii) coming in as a partner to an FI, the project developer is released from the pressure of upfront infusion of significant equity; and (iii) parties are better-placed to assume risks suited to their strengths, with the FI taking over the financial risk, and the operational risks transferred to the project developer on back-to-back basis.

Also, to encourage participation amid the pandemic, the government has relaxed the financial as well as the technical eligibility criteria for bidders for highway projects. For instance, net worth requirements for HAM projects has been reduced from 25% of estimated project cost to 15%. Further, for both HAM and BOT projects, the capital cost of the eligible projects for technical qualification has been reduced from 10% of estimated project cost to 5%. The relaxations will provide much-needed relief to those construction companies whose eligibility to bid for new projects has been hampered on account of the pandemic-led business disruptions.

Post-pandemic era how do you envision the transformation of design / construction processes especially with the advent of disruptive technologies and smart & intelligent machine features?

A prominent way to fast-track projects in the roads and highways sector is the use of specialised and technologically-advanced construction equipment.

In December 2020, MoRTH released a consolidated version of all codal provisions and guidelines regarding cost-effective new/alternative material and technology in highway construction. Some of the new/alternative materials and technologies mentioned are waste plastic, fly-ash, modified bitumen, soil stabilization techniques, etc. This is being done to ensure adoption of the latest technologies and eco-friendly materials in road construction to enhance the economic and environment viability of the projects. The initiative has been well-received by road developers/contractors.

Indeed, durable roads with long life and low maintenance are a priority. In order to bear the increasing traffic load, and to overcome various challenges, such as time and cost overruns, and congestion, the sector will have to develop new materials, processes and technologies.

This will require dedicated research and development by the government as well as the private sector. The key task, however, will be adoption and implementation of the new technologies and methodologies developed.

How important it to have a judicious mix of awards that may attract more investments / participants in the sector? What are the challenges here? 

In India, national highway projects are executed via the EPC (government funds the construction costfully), HAM (partially during the construction period & payments spread over the O&M period), and BOT-toll (developer bears the risk unless there is viability gap funding) modes.

While NHAI had decided to award HAM, EPC and BOT-toll projects in a 50:40:10 ratio under phase I of Bharatmala Pariyojna, there has been a lack of interest in BOT-toll projects. With ~35,000 km of highways planned under the phase I, 3,500 km of highways was planned to be awarded on BOT-toll mode. However, only two projects of ~209 km have been awarded on BOT-toll between 2017 and to-date. The major reason for this is financial stress faced by developers that won BOT-toll projects, only to find it difficult to implement owing to delays in construction and lower-than-estimated revenue. The EPC and HAM models, although being beneficial to private players, in terms of being less risky compared with the BOT-toll model, lays the burden of finances on the government.

To achieve the ambitious roads and highways development programme, an optimum mix of awards, i.e. combination of HAM, EPC and BOT-toll, is necessary to ensure that risk is adequately divided between the government and private players, and to attract higher investment and participation.

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