CRISIL expects the first bundle of nine toll-operate-transfer (TOT) projects put up by the National Highways Authority of India (NHAI) to elicit good response from foreign investors, given their long-term investment horizon and aversion to construction risk.
If that happens, it would also mark the single-largest foreign investment in India’s road transportation sector with a ticket size of Rs 6500 – Rs 7000 cr.
The NHAI is raising funds by packaging road assets under innovative monetising structures such as TOT, which was announced in the Union Budget for next fiscal. CRISIL estimates that NHAI can raise ~ Rs 60,000 cr, over the next 2-3 years, for the 75 road stretches already identified to be bid under the TOT mode.
Since these projects have limited implementation risk and largely stable cash flows, they are expected to offer a 12-13% internal rate of return (IRR), which is lower compared with the 16-18% generated in build-operate-transfer (BOT) 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.
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 operation and maintenance (O&M) companies to leverage their expertise, which would make it a win-win.
The TOT model introduced by the NHAI awards packages of already operational road assets to winning bidders who are then licensed to collect toll on, and have to maintain, the roads over the life of the concession.
The upcoming bids for the first TOT package expected this week, comprises nine highway stretches in Andhra Pradesh and Gujarat, which ensures geographic diversification. Six of these are in Gujarat and have high upside potential for traffic, given the presence of industrial clusters and consumption centres in the periphery. Further, toll rate escalations have a 3% fixed component and depends 40% on the Wholesale Price Index, which limits the complete dependence on WPI as in case of existing BOT projects. But risks remain, including of alternate routes, latent defects and lack of sufficient traffic data.
Says Sachin Gupta, Senior Director - CRISIL Ratings, “The bidders’ ability to correctly estimate project revenues for a long concession (30 years) and tie up debt for a 22-25 years at an adequate debt-equity mix would be critical with a requirement of large upfront capital.”
Besides, competing roads pose a demand risk, just as in build-operate-transfer, or BOT, projects. Base traffic assumption, debt-equity funding mix, tenure and structuring of the debt would remain key credit factors.
Says Sushmita Majumdar, Director – CRISIL Ratings, “For the NHAI, increased project awarding on engineering procurement and construction, or EPC, and hybrid annuity model, or HAM, have pushed up the funding requirement. Monetisation of assets through innovative structures such as TOT would help meet the outlay of investment planned for the sector as recently unveiled in the Budget, with Rs 5.35 lakh crore allocated for roads development under the Bharatmala project.”