In the last fiscal, India’s premier road construction authority, the National Highways Authority of India (NHAI), kept up the rapid expansion momentum of recent years, constructing over 30 km of roads daily while new highway awards topped 12,375 km. Such diligent expansion of the country’s highway network in recent years has left the authority with a massive `3.42 trillion debt (at the end of March 2023).Not surprisingly, the Government is now intently focusing on mopping up funds from the private sector to further expand the existing highway network and service the highway authority’s debt. A proposed National Monetisation Plan (NMP) detailed in 2021 estimated raising Rs.6 trillion through the core assets of the Central Government between 2021 and 2026. Monetising 26,700 km of four-lane and above national highways was expected to contribute 27 per cent (`1.6 trillion) of this sum.Crisil has estimated that NHAI’s need for funds will double to Rs.10 trillion over the next five-year period vis-à-vis the previous five years, and that 15 per cent of this sum could be generated by the monetisation of assets. It has also estimated that if this funding comes through, NHAI could construct 25,000 km of national highways between 2022 and 2026, compared to 17,228 km between 2017 and 2021.Infra trusts to the rescueTo support the Government’s NMP, in October 2021, NHAI created the National Highways Infra Trust (NHAI InvIT), an infrastructure investment trust. “Asset monetisation through the NHAI InvIT will play a big role in the repayment of principal amounts so that NHAI achieves its plan to significantly reduce its current outstanding debt by 2029-30,” notes Puneet Narang, Partner, Major Projects, Business Consulting, KPMG in India. “Essentially, the NMP aims at tapping into institutional and private-sector investment for the creation of new infrastructure.”By June 2022, the NHAI InvIT had kickstarted the fund-raising process for toll road assets spanning 637 km. Mostly, these assets attracted institutional investors, pension funds and global equity investment firms, including CPP Investments and the Ontario Teachers’ Pension Fund. In a subsequent round, it raised around Rs.38 billion through a follow-on market offer for institutional investors and a non-convertible debenture issue. Now, NHAI is targeting raising Rs.75-80 billion in a third round, and thereafter at least another Rs.30 billion in a fourth round.What does the industry say about these developments?“The NHAI’s InvIT has got a very good response so far; the recent InVIT bond was oversubscribed, which shows that overseas investors, mostly pension funds, have confidence in the assets on offer,” says Akhilesh Srivastava, Road Safety Ambassador for the International Roads Federation and a former board member of the NHAI InVIT. “There is significant interest in India’s road story overseas,” agrees Pankaj Vatsa, Executive Director, Transportation & Urban, South Asia, Egis in India. “Vinci Highways had shut shop in India after burning its fingers eight years ago but now plans to return. Mubadala, HSBC and Macquarie are some other financial institutions that are interested.”“The Indian roads sector is quite bullish and is expected to drive a lot of interest from domestic as well as overseas companies because the road network will facilitate the economy, and the economic growth forecast is positive,” opines Dr Mukul Shastry, General Counsel, Cube Highways.Economic growth implies attractive gains for investors in highway assets. That said, “returns on road projects are dependent on risks to the investors, which can range from factors like past traffic history, future growth and risks from emerging new corridors such as the Delhi-Mumbai Expressway to newer segments like DFCC, other possible diversions, locational challenges, natural catastrophe (NATCAT) risks, asset quality and emerging geopolitical scenarios,” observes Manish Chitkara, Managing Director, Sekura India Management, Roads Portfolio; Director, Sekura Roads; and Director, Epic Concesiones.“A decade or two ago, investors were targeting 21-22 per cent internal rate of return (IRR) from road projects but now these estimates have become more realistic; 15-16 per cent IRR is attainable provided the assets are cherry-picked and the cost of funds is low,” says Vatsa. In his view, more marketing and outreach and the better bundling of roads for investors is essential to attract more investors.“Highway assets with a proven track record of operations, swift technology adoption, sustainable returns and a long residual life are the key to attract investors,” opines Narang.Investments in operational highwaysWhile the NHAI InvIT is slowly becoming a preferred route for the Government, Devayan Dey, Partner, Capital Projects and Infrastructure, PwC India, points out that the Toll-Operate-Transfer (TOT) route is as essential to monetise the authority’s highway assets, particularly to encourage domestic investors.“We have pure-play financial investors who may not be interested in operating the assets directly, for whom the NHAI InvIT is ideal,” says Dey. “But in India, we also have another class of investors, who are somewhere in between strategic and financial investors. They like to be involved in operating assets and have the ability to add value to physical and financial assets. For such investors, ToT and operating BOT-Toll would always be a preferred route. It’s important for the Government to strike a balance between TOT and InvIT.” TOT options are attracting both Indian companies and overseas investors, some partnering Indian players.“Overseas pension funds stand to earn much more from TOT highway bundles in India than the nominal returns they offer to their beneficiaries or the sort of assets that they usually park their money in,” opines Srivastava.What stands out among domestic players is their long-term vision. “Every company investing in highway projects to operate on the TOT model, be it KKR, Blackstone, Cube Highways or anyone else, has a long-term, say a 25-year, vision while bidding for the asset it wishes to acquire,” points out Dr Shastry. “Assets are evaluated for their commercial viability over this period based on certain assumptions such as traffic growth forecasts and growth of the economy in the region.”“In the roads sector, we are very keen to acquire quality operational assets with a suitable residual life (across DBFOT-Toll, DBFOT-Annuity, HAM) besides TOT bundles of NHAI/ MORTH,” says Chitkara. “While investing in a highway, we would consider the type of concession agreement and balance concession life, past traffic growth, current trend, traffic composition, potential and realistic forecast for the balance period, the viability of the corridor and its potential in terms of growth, competing roads, likely diversions, the asset quality, condition of the pavement and overlay requirement in future based on traffic and overloading trends, locational risks like proximity to rivers, flooding conditions, seismic conditions and the track record of the developer in delivering quality assets.”The future success of the TOT model depends on the quality of assets offered. “Different players will bid significantly different amounts for assets based on their assumptions,” continues Dr Shastry. “Sometimes, an investor may want to acquire an asset for strategic reasons, perhaps it lies in a geography the investor wants to enter, or it is situated near an existing asset of the investor, or the investor is new to the domain, and this reason gets reflected in the bid price. The law-and-order situation prevailing in the state the asset lies in will also reflect on the bid.”Dey points out that two factors related to traffic play an integral role in how valuations are perceived by investors. First, is there captive traffic? That is, whether the origin or destination of goods transported on the corridor falls on the corridor. Aspects like these provide confidence around the reduced volatility of the base traffic itself, as well as future growth. Creating growth in industries, warehouses and tourism activity along the corridor can be beneficial. Second, investors look to see if a competing route or even a competing mode (for example, rail) falls on the corridor. “Such aspects dampen the perspective on traffic as different modes like the dedicated freight corridor can cannibalise road traffic,” adds Dey. “If infrastructure projects across the road and rail mode are planned to complement each other, both modes enjoy improved viability.”In this context, most national highway corridors have a good traffic base, according to Dey. “However, at the state level, the monetisation opportunities today are more around urban roads (such as ring roads of major metropolitan cities). State highways are typically two-lane with paved shoulder configuration, which is often not the preferred route for freight as such infrastructure isn’t conducive to manoeuvring large logistics vehicles.”Traditional planning at the state level has involved putting up infrastructure after the demand is created, explains Dey. “Instead, if infrastructure were to drive demand, such as by providing high configuration connectivity to planned industrial clusters, the likelihood of larger industries coming in increases. Coordination between various sectors like industry, warehousing, agriculture and tourism to identify the large corridors across the state that can boost economic activity and drive traffic and economic growth is essential for the state highway asset monetisation story to pick up.”According to Himanshu Chaturvedi, Chief Strategy & Growth Officer, Tata Projects, operating roads with some tolling history would be ripe for monetisation. He calls the experience in monetisation through TOT “patchy so far”.  To improve this experience, he believes NHAI should have wide consultations with the investor community. “This would help refine its TOT or InvIT model to encourage healthy participation in future bids.”Back to ‘day one’ monetisationAt a recent event on infrastructure financing in Kozhikode, Partha Sarthi Reddy of Niti Aayog expressed the view that it was time to revive the Build-Operate-Transfer (BOT) tendering model in the roads sector.The BOT model was widely used between 2004 and 2014 before it went out of favour. In the past five years, BOT project awards have accounted for less than 5 per cent of the authority’s orders and this situation is expected to continue in the present year. However, the BOT model is considered “the best contract mode from the perspective of limiting the financial burden on the highway authority because the developer invests in the highway”, according to Vatsa.“The BOT model is the best way to go for future highway expansion as it is monetised from day one,” says Srivastava. “BOT Toll needs revival,” opines Dey. “After all, reducing the EPC cost payable by authorities for building newer assets is also monetisation in the true sense. And there are formats available to revive BOTs for better primary and secondary market acceptance.”“The BOT model would have delivered much better returns to NHAI,” says Dr Shastry, who foresees a return of BOT despite the fact that it hasn’t done well. “The NHAI InVIT project would, like NHAI, be run by bureaucrats and hence could be prone to the same inefficiencies whereas public bidding would bring in private players.”While Srivastava points out that a technology like FASTag is proving to be a game-changer for the BOT model by increasing the revenue potential, what would it take for the BOT model to be widely implemented again?In the first innings of the BOT contract mode, NHAI was both jury and judge to resolve disputes with awardee companies, which wasn’t a healthy situation, says Vatsa. “A highway developer should have been treated differently to a contractor implementing a highway project in return for a fee, but this shift in the mindset of the authority didn’t happen, which exacerbated the number of litigations.”Second, land was either acquired late, or not acquired, or acquired on paper but not physically handed over to the developer, which led to cost escalations, continues Vatsa. Third, proper due diligence by banks and developers was missing as projects were shown to be rosier with respect to traffic growth and cost of construction. “Fourth, the relationship between some bankers and developers was questionable; we saw bankers appoint lender engineers to oversee their interest but these engineers were paid salaries by the concessionaires instead of the bankers.”Since then, changes have been made in the model concession agreement to make the risk more equitable, the choice of highways for the BOT model is now founded on more realistic data and land acquisition has improved considerably since a decade ago, says Vatsa. “But the highway authority still needs to appoint a third party to solve disputes and the relationship between developers and bankers must be sanitised.”Time will tell which asset monetisation route delivers best. What is clear for now is that fast-paced transparent monetisation is the need of the hour.