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New funding mechanisms to support project execution
CRISIL Research estimates project execution by the National Highways Authority of India (NHAI) reached 3,070 km in fiscal 2018 and ~3,300 km in fiscal 2019, from 2,625 km in fiscal 2017. Such a pace of execution will involve a sizeable increase in investment. In fact, we expect overall investmentto rise thrice over the next five years. With public investment constituting a considerable 70% of the total investment in national highways, the funding needs of the NHAI - the key implementing agency - are set to rise. While cess used to be NHAIs biggest source of funding, the model is undergoing a change, with the NHAI supporting project execution through higher external borrowings. Consequently, the NHAI will have to tap previously untappedsources. These include toll-operate-transfer (TOT), with the the first bundle awarded in fiscal 2018 and masala bonds, with the first tranche being issued in fiscal 2018. Along with that, the NHAI can also look at possible inflows from listing and through infrastructure innvestment trust (InvITs).
While the NHAI had a budgeted Rs 121 billion of cess funds in fiscal 2017, it utilised Rs 75 billion. The agency instead raised funds from institutionalinvestors such as the Life Insurance Corporation (LIC - Rs 85 billion) and the Employees' Provident Fund of India (EPFO - Rs 100 billion). The LICagreed, in principle, to subscribe to NHAI taxable bonds to the tune of Rs 250 billion over the next three-four years. The agency also raised Rs 50billion this year on the Bombay Stock Exchange's bond platform.
In May 2017, the NHAI issued masala bonds worth Rs 30 billion on the London Stock Exchange, which received a strong investor response. In June2017, it issued another tranche of bonds of 30-year duration to LIC, worth Rs 50 billion.
Also, the NHAI has raised Rs 100 billion last fiscal from the National Small Savings Fund (NSSF) and plans to raise another Rs 100 billion in thecoming months.
Over the next five years, the share of the NHAIs funding through cess is expected to remain high, at ~36%. However, if adequate cess funding is notprovided by the ministry to the NHAI, it will have to increase its dependence on borrowing and institutional financing. In this scenario, the ability of theNHAI to consistently raise debt through external sources is a key monitorable. TOT is a new public-private partnership model for maintenance that theNHAI is pursuing, and which is expected to provide the agency Rs 400 billion over the next two-three years. The first bundle under the TOT model wasbid out at Rs 96.8 billion. However, reforms such as the Goods and Services Tax and implementation of the dedicated freight corridor may significantlyimpact traffic composition.
Private participation in national highways is expected at 35-40% over the next two years, and 30% over a five-yearperiod. Bank credit to the sector is expected to grow at 9-10% over the next five years. However, to support the expected level of private participation,lending support to the sector is required to grow at considerably higher pace. This shortfall will have to be funded through avenues such as the NationalInfrastructure Investment Fund.