ROADS & HIGHWAYS: On The Growth Path

India has the second largest road network in the world with a length of over 6.2 million kilometres. The Indian highways comprising 2 per cent of the roads carry 40 per cent of the total traffic. As a result, the roads sector has a significant share in the multi-modal transport of goods and passengers in India.  This has also translated into the sector contributing to approximately 4.5 per cent to the country's GDP according to some estimates. To reduce the logistics costs and improve connectivity, the government has laid emphasis on the creation of quality infrastructure by encouraging private participation. 

Under the National Infrastructure Pipeline, India is spending USD 1.4 trillion between 2019 and 2025. Of this, about USD 280 billion is being spent on the roads and highways sector. Over the last few years, the government has been implementing various schemes for construction, development, and expansion of the highway network. These include the National Highway Development Programme and the 'Bharatmala Pariyojana', under which over 66,000 kilometres of highways are being constructed. To encourage private participation, a significant thrust has been given to project execution through Public Private Partnership (PPP) model. The National Highway Authority of India (NHAI) has awarded projects through the Build-Operate-Transfer and the Hybrid Annuity Models. The Model Concession Agreements for these models have also been periodically revised to incorporate investor feedback. Owing to the constant efforts to expedite the pace of development, India constructed 37 kilometres of roads per day in 2020-21, the highest rate ever achieved.

The roads and highways sector has received wide interest from institutional investors. As part of the maiden asset recycling project, the National Highway Authority of India (NHAI) in 2016 gave 9 operational roads for a period of 30 years as part of the Toll-Operate-Transfer (TOT) Model. Australian Fund manager Macquarie acquired these roads for USD 1.45 billion against a reserve price of USD 1 billion. Since then, an additional bundle of 9 roads has been acquired for USD 688 Million by Cube Highways, backed by institutional investors such as I Squared Capital, ADIA, Mitsubishi Corporation, and IFC. To allow a wider pool of investors to participate through the TOT Model, the bundle sizes have been made smaller.  The two assets under TOT Bundle 5 have received initial bids in the range of USD 139 Million to USD 172 Million.

The NHAI is also coming out with the first government sponsored InvIT with an initial portfolio of 5 roads with a length of 389 kilometres.2 The privately placed InvIT is likely to attract significant interest from global investors, including pension funds, who are looking to be a part of India's infrastructure growth story.  In addition to raising funds through the ToT Model and the InvIT, NHAI has also received Cabinet approval to securitize toll and user fee collected from national highways. This will allow it to raise long-term finance from institutions and provide an alternate mode of asset monetization.

The National Monetisation Pipeline launched in 2021 also lays out a lucrative pipeline of public assets where private institutional investment is being invited by the government. Out of the USD 81 billion pipeline, roads and highway assets have the largest share at 27 per cent. The USD 21 billion opportunity to acquire operational and revenue generating assets includes highways spanning across 26,700 kilometres, which is approximately 22 per cent of the total national highway length in India.

In March 2021, the government announced the 'Vehicle Scrappage Policy'. The objectives of the policy include a reduction in old and defective vehicles, lowering pollution to fulfil India's climate commitments, and improving overall road safety. To create a new ecosystem comprising vehicle scrappage facilities and automated testing stations, an investment of approximately USD 1.4 billion will be made, which is expected to create 35,000 jobs. Through these efforts, India is likely to emerge as the regional hub for vehicle scrappage related activities. The decommissioning of old vehicles is also expected to fuel additional demand for new cars in the country, further propelling India's current position as the world's fourth largest automobile market. 

By 2025, India is expected to increase the length of national highways to approximately 1,99,000 kilometres, through a significant increase in private participation.3 Further, a large share of existing assets is likely to be transferred to financial investors and aggregators. By introducing electronic toll collection and promoting deeper penetration of advanced technologies such as automated traffic controllers, the commuter experience is also being improved. To further improve customer experience and build in efficiencies, the government has announced the removal of toll plazas across the country and move to a GPS-based system of user fee collection. Through a combination of reforms and participation of investors, the Indian Roads and Highways sector is poised for growth and transformation.

Vatsal Khullar

Senior Investment Specialist, Invest India

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