In an exclusive interview to INFRASTRUCTURE TODAY, Debjani Chakrabarti, Director Highways, Ministry of Road Transport & Highways (MoRTH) elucidates some of the key funding strategies being utilised by India as a part of the country's ambitious Rs 7 trillion roads building programme. She also confirms that MoRTH's nodal agency, the National Highways Authority of India (NHAI) is examining the option of creating an infrastructure investment trust (InVIt).
The government has envisaged an outlay of Rs.6.92 lakh crore for its ambitious road building programme and Rs.5.35 lakh crore for the Bharatmala Pariyojana. What are the various funding strategies being considered by the ministry?
The funding strategy would comprise budgetary support and market borrowings. Our budget reaps returns in the form of consolidated funds, from the ploughing back of toll revenue of our public-funded projects. Part of cess on petrol and diesel also comes to us through the budget. We also raise funds from domestic as well as international markets through bonds. In the domestic market, we will borrow from different sources, including domestic pension funds like Life Insurance Corporation (LIC) and Employees' Provident Fund Organisation (EPFO). We will also borrow from international markets through instruments like masala bonds. Lastly, we will monetise our public-funded road assets that are operational, wherein tolling rights are to be assigned to developers for a 30-year period against payment of a market determined upfront fee to be determined through open bidding. O&M responsibilities for the period shall rest with the developer. Over and above these, some investment is also envisaged from private sector through public-private partnerships (PPPs).
What are the best funding options available that can be leveraged by both road developers and investors?
Now there are three different modes of delivery for highway projects. First, there is the build-operate-transfer (BOT) [toll] model, which is a PPP mode of delivery. In this model, the private concessionaire or developer invests in developing the road and, in return, gets tolling rights for the developed road. The developer recovers his costs by tolling the entire stretch over a period of time and there is a defined concession period for that. Second is the Hybrid Annuity Mode (HAM), where the government bears 40 per cent of the construction cost in five instalments linked to physical completion milestones. Here, the burden of raising money by the developer is reduced to 60 per cent, out of which his equity is even smaller. The comfort level for the concessionaire is very high in this case, and he does not have to take the tolling risk. The developer takes the construction risk and recovers 60 per cent of the cost in the form of annuities from the authority. Everything is inflation indexed. This model is for those stretches, where your rate of return on equity is less than 15 per cent. Then there are public-funded engineering, procurement, construction (EPC) roads, where the entire funding is done by the government.
How are the modes determined?
Our requirement of funds from the budget or markets will entirely depend on the kind of project risk we are taking in terms of the mode of delivery. The more projects we take in the BOT mode, the lesser will be the upfront fund utilisation from allocated funds and resources raised from the market in comparison to projects in the EPC mode. We have also imagined a scenario where we will try to do at least 40 per cent of the projects in the PPP mode. That is because the first phase of 24,800 km of the Bharat Mala programme has multiple components, which include economic corridors; inter-connectivity corridors; feeder routes; the National Corridor Infrastructure Improvement Programme that involves improving the Golden Quadrilateral, north-south and eastûwest corridors; border roads; port and coastal connectivity projects and expressways. Of the 25,000-odd km and 10,000 km of the remaining National Highway Development Programme (NHDP) to be completed, about 18,000 km are established corridors. The traffic there is expected to grow annually at a rate of over 12 per cent. The traffic in these corridors is anywhere between 40,000 to 60,000 passenger car units (PCU). All these stretches are suitable for upgradation which will lead to enhanced logistics efficiency.
It needs to be appreciated that expenditure on an awarded national highway project is not uniformly distributed over the construction period. For instance, in the initial year following the award, it may be around 10 to 15 per cent of the cost, which may peak to around 50 per cent in the following year. Therefore, raising resources needs to be matched with this pattern.
The entire budgetary support and money raised from the markets will be aligned with the construction cycle of projects. Financial planning is done at the implementing agencies, that is, at NHAI and National Highways & Infrastructure Development Corporation Ltd (NHIDCL), which is in tandem with the construction cycle and preparedness for project stretches. Our current expenditure, say Rs 1 lakh crore in the last year, will increase progressively. That means, the annual expenditure will increase to Rs 1.5 lakh crore, then to Rs 1.7 lakh crore and then to Rs 1.8 lakh crore. Fund availability will not be a constraint. The NHAI is now AAA-rated in the domestic market and it has also been rated Baa3 internationally by Moody's. There is enough space within our ecosystem to raise funds. What we do not want is to raise funds unnecessarily from the market and park them in accounts without utilising. Once we finish construction, after two years of stable traffic, we will get the projects monetised. So, we will also be getting the money back for further road building. That is how the planning is done, processes streamlined and land acquisition issues resolved.
Which mode of development has had the best success in terms of project execution?
We have done a good number of projects under BOT [toll]. We now have over 200-plus concessions running in the country and that speaks for itself. We are also executing a lot of EPC as well as HAM projects. All the models are successful in the circumstances that they are being executed under. In toll-operateûtransfer (ToT), bid for our first bundle is out for 680 km.
Meanwhile, the government has set up agencies such as the National Investment & Infrastructure Fund (NIIF). Are they helping in the funding of road infrastructure projects?
NIIF is a fund created by the Government of India for enhancing infrastructure financing in the country. Its creation was announced in the Union Budget of 2015û16 and it was registered with SEBI in December 2015. It is mandated to invest in both greenfield and brownfield projects through suitable instruments. Apart from Government of India funds, NIIF raises capital from international markets. It is supposed to invest in signature infrastructure projects in the country that assure a definite return, both in the form of equity as well as debt.
As of now, it is more interested in brownfield projects, that is, it wants completed road projects to be given to it and then it would bid them out. We would, however, prefer to bid our own roads than give them to NIIF. NIIF can participate in the bid that we have floated for ToT.
But we cannot give it completed assets and allow it to bid on our behalf. We cannot allow that to happen in the current framework. Having said that, NIIF is also interested in developing logistics facilities in the country, which is directly related to freight movement and its evacuation in our economic corridors. That way, it is complementing our role. We would definitely want to work more with NIIF in future.
And what about masala bonds and InVIts?
The rupee-denominated masala bonds in the international markets have provisions for bullet payment, where you raise funds and make a one-time payment after five or seven years. In May 2017, we raised about Rs 3,000 crore through masala bonds on the London Stock Exchange (LSE). This is a largely untapped market. We will do masala bond issuance again, if we have a project whose DPR and bid is ready with a definite construction cycle. That is the cycle we want to use so that we do not unnecessarily end up servicing the loans that we raise from the market without actually making use of the borrowed funds. Prudent financial management is very much a part of this entire narrative built around the Bharatmala project. It is not just about construction, but it is also about how you manage your funds wisely to reduce construction costs, with emphasis on technology and good financial management.
InVIts are presently being used by big construction companies with due approval of NHAI. Let us say, Company X wants to raise money from retail investors and the firm has some 10 operational and revenue-earning roads. They will form an InVIt based on earnings from these projects and assure a certain return to their investors. The funds raised by Company X through the InVIt will be utilised to construct more assets and, at the same time, provide a definite return to people who have invested in the InVIt. NHAI is also exploring the option of creating an InVIt, but that is still at a nascent stage.
The government is considering raising money from pension funds. Will retirement funds suffice to meet the actual demand for capital?
Pension funds are 'patient capital' as they are not looking at immediate returns. These are long-term funds where the returns can come in at a later point in time. Since withdrawal requirement from the EPFO are pre-determined and spread over a period, the money stays. It is one of the avenues from where we will raise money, but it is not "the only fund" that we will depend on.
- Manish Pant