India's 4.87 million km road network is second largest in the world and accounts for almost 80% of the passenger traffic and 60% of the freight traffic. The Government's intent in developing roads sector is evident from increased budgetary allocation of INR 64, 900 crores in 2017, a 12% increment from last year, and introduction of numerous fiscal incentives and legislative reforms.
Structuring of Public Private Partnership models
Traditionally, the PPP projects in roads were high risk and faced instances of delays and disputes related to land acquisition and environment. To mitigate these, NHAI has remodeled the model concession agreement to introduce the hybrid annuity model ("HAM"). In the earlier build-operate-transfer model, the concessionaire bore major part of project risk. Under HAM, 40% of the project cost is borne by the Government and 60% is funded by the developer. NHAI collects the revenue through toll, thereby absorbing the traffic risk, and the concessionaire gets steady flow of revenue and profit through annuity payments.
The Government recently approved the toll operate transfer ("TOT") model in toll operation. The TOT model involves 30 year leasing of toll collection and operation duties of highway projects, currently operated by the NHAI for more than 2 years, to investors that include foreign funds, in consideration of an upfront payment paid by the investor to NHAI. The operate-maintain-transfer (OMT) model utilized earlier entailed the selected bidder managing the project for a shorter tenure which resulted in poor maintenance while annual payouts to NHAI increased yearly, without factoring changes in the traffic flow or revenue of the investor.
Mitigating the persistent issues
Lock-in period
In the BOT projects awarded before 2009, the developer had to maintain a minimum 26% stake in the concessionaire for the entire concession period, irrespective of the revenue earned and the financial status. This compounded the debt burden and financial issues of the developers. The Government eventually allowed developers to divest their 100% stake, 2 years after the project commissioning. This has attracted interest from the PEs which prefer holding bigger stakes in a project.
Land Issues
The land issues in roads included public pitted against the land acquisitions, and encroachments causing delays and losses to the developer. While the right to fair compensation and transparency in the Land Acquisition, Rehabilitation and Resettlement Act, 2013 attempted to address the issue by elaborating on the public interest aspect involved in such projects and limiting the role of the government to that of a facilitator in the land acquisition process, land acquisition remains a big challenge for the new projects.
Fiscal Incentives
Government has allowed 100 % FDI through automatic route in the roads and also up to 100% FDI for the support services to road sector; 100% exemption in taxes for 5 years and 30% for another 5 years, duty free imports of high capacity construction equipment and viability gap funding up to 40% of project cost to enhance viability on a case to case basis.
Advent of Infrastructure Investment Trusts
To facilitate investments in infrastructure sector, the Government has allowed registration of infrastructure investment trust ("InvIT") in India, to raise funds for both lending and investing in infrastructure projects. This will ensure renewed investments in new projects alongwith unburdening the existing developers from their debts. Recently, the SEBI permitted IRB Infrastructure Developers and GMR Infrastructure to procure funding under this scheme, both of which have interests in roads.
Other Mitigates
Other issues for developer remain concerning delays in obtaining approvals and clearances, one sided contractual arrangements favouring the NHAI, inadequate traffic on highways and challenges in raising funds. Certain mitigating measures include States being empowered to clear projects limited to 40 acres of forest land, procedure for clearances related to bridges being simplified by applications being allowed to be made and approved online, contractual issues and traffic risk problems being addressed through the HAM, the debt mechanism being better placed after the advent of methods such as the 5:25 scheme that permits longer duration loans to cover almost 80% of the concession period and the banks classifying rights of developers relating to annuities and collection of toll as tangible securities.
Mergers and Acquisitions in roads
Interest in M&A in roads has been high recently and is likely to increase as more projects become operational. M&As are also on the rise as the valuation of road assets have vastly improved in the past few years due to rise in toll collections and fall in interest rates. The rating agency ICRA recently reported that investors such as Brookfield Asset Management of Canada, Canadian Pension Funds, Macquarie Australia, Abertis Infraestructuras of Spain, IDFC Alternatives and I Squared Capital of the USA (Cube Highways) are evaluating road assets for investments.
Despite the positive sentiment, certain issues concerning the M&As remain in roads. Apart from usual sectoral risks, road projects have a fixed duration concession which results in the low risk appetite of the investors. Heavy reliance is placed on valuations of traffic and maintenance and operation costs of the projects. Also, transactions are aggressively negotiated between the parties on representation, indemnities and liabilities.
Conclusion
Road sector in India is at the brink of realizing its potential which would consequently provide the much needed impetus to Indian economic growth. The initiatives taken by the government are extremely positive and send an unequivocal sign to all investors that the time is right for participating in the development of this sector.
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