Indian infrastructure: The road sector shows the way

By K. Vinay Pratap

The Indian road sector has been inexorably abundant for some time. According to the World Bank’s Infrastructure Private Participation Database, India has the largest number of PPP road projects in the developing world – 501 (worth $ 92.5 billion) in 1990-2021. This is about 44% of the total number of PPP projects in the country and over 32% of the total investments in such projects. Consider the latest deals in the private road sector:

– IRB Infrastructure achieved financial closure of the Mumbai-Puna Expressway in a major initiative to monetize abandoned assets at the state level for a total remuneration of 8,262 rupees (June 2020);

– Adani Group has signed a contract for the construction of the longest highway project in India – the Meerut-Prayagraj highway worth Rs 17,000 – in Uttar Pradesh (December 2021). This will be a six-lane controlled access highway built on PPP (Design-Build-Finance-Operate-Transfer) mode with a concession period of 30 years.

– CDPQ (Quebec Depot and Placement Office, Canadian Pension Fund) bought a 40% stake in the toll road Odisha (67 km long Shree Jagannath Expressway) for 2100 kroner (December 2021).

– KKR, the world’s leading investment firm, and the Ontario Teachers Pension Plan Board (OTPPB) have signed an agreement under which Ontario Teachers will invest up to $ 175 million in KKR’s road platform in India, which includes Highway Concession One (April 2022). ).

– Welspun sold six operational highway projects to British investor PE, Actis, for a value of Rs 6,000 crore ($ 775 million). This will be funded by the Actis Long Life Infrastructure Fund (ALLIF) (June 2022).

– The IndInfravit Trust, led by the Canadian Pension Plan Investment Council (CPPIB), has entered into an agreement to buy a stake in five Brookfield operational road projects in a deal worth Rs 9,375 (June 2022). The deal estimates the equity of the five road assets that Brookfield owns at around Rs 6,000 crore. The business also has a debt of Rs 3,000-Rs 3,200 crore. The road portfolio consists of three toll roads and two annuity roads with about 2,400 km of lanes in Andhra Pradesh, Bihar, Maharashtra and Uttar Pradesh.

The transactions took place during the Covid-19 period and are worth over Rs 44,000. The investment is mainly from foreign institutional investors or FII (CDPQ, CPPIB, OTPPB) – a sought-after source of infrastructure financing, as there is no mismatch between assets and liabilities. There are investments in both green and abandoned, but the obvious preference of FII is abandoned, as such projects have passed the construction stage and the risks of land acquisition and protection of the environment and forests. They are good for financing infrastructure.

Why did this happen? A clear political, institutional and regulatory framework has been developed in the road sector. The lack of an independent regulator in the road sector (as opposed to energy, airport, telecommunications, etc.) and the predominance of “contractual regulation” underscore the fact that having an independent sectoral regulator is neither necessary nor sufficient for private distribution. participation in each sector. The procurement process has been simplified and standardized. The Cabinet-approved model concession agreement (MCA) in the road sector has standardized provisions on the conditions to be met by both the public and private sectors, user charges and their escalation, dispute resolution, termination and force majeure, ensuring balanced risk – a framework for the return of the private sector to invest and thrive. A well-written and executable contract is necessary for long-term infrastructure investments, as most such investments are impossible costs and require the comfort of CA to mitigate risk. Then there is non-viability funding (VGF) for economically viable projects that do not reach the financial viability threshold. In fact, the highest VGF among all infrastructure sectors went to the road sector, both in absolute terms and in number of projects.

The sector is also a pioneer in the monetization of abandoned industrial assets in India, with the first toll-transfer transaction (TOT) taking place in 2018, which led to a good return for the government, as the premium to ordinary business was around 55%. Nine projects of 680 km were proposed for the winning consortium of Macquarie and Ashoka Buildcon, and the realized value was Rs 9,681 crore against the value of the usual business of Rs 6,258 crore. So far, a total of four TOT transactions have taken place in the road sector, raising 16,954 rupees and involving road assets of 1,408 km.

The sector is a pioneer in InvITs, with IRB InvIT (listed, public) being the first InvIT in the country to appear in 2017, with current assets under management of Rs 6,500. The National Highway Administration of India created the second public sector sponsored InvIT (listed, private) in November 2021, which has already raised over Rs 8,000 crore and has investors including CPPIB and OTPPB. He owns five toll road assets of 390km and will add more projects later.

The road sector has important lessons for other infrastructure sectors and for Indian infrastructure in general to increase funding so that a lack of infrastructure does not become a binding constraint on the growth of the Indian economy.

(The writer is a senior economic adviser to the Government of India and a former joint secretary of the Ministry of Finance.)

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