The highway sector has been the ignitor of PPP framework in India. The sector has received a significant support from the government and NHAI has played its role well through constant innovation.
Highways in India account for almost
60 per cent of freight and 80 per cent of passenger transportation; the sector continues to remain a key focus area for the government for the last few decades. The sector witnessed a loss in momentum after FY12, however new asset creation has once again gained pace and programmes like the Hybrid Annuity Model (HAM), Toll Operate Transfer (TOT) model and the launch of Bharatmala have generated significant traction. Awarding activity by the National Highways Authority of India (NHAI) and the Ministry of Road, Transport and Highways (MoRTH) stood at 17,055 km in FY18, having surpassed the previous peak of 6,500 km in FY12. Solid project pipeline will ensure that India is well positioned to achieve its road sector expansion targets. However, funding could be a potential roadblock.
Roads and Highways- The backbone of India's transportation India's road network, spanning over 5.6 million km, is the second largest road network in the world after the USA.
Vis-a-vis, 60 per cent of freight being transported by roads in India, roads in the USA carry 30 per cent of freight and in China carry 35 per cent of freight, reemphasising the over-dependence on the sector. This is largely due to the capacity addition in other transportation sectors having not kept pace with the economy's growth.
Railway's share in freight transportation has witnessed a steep decline from 85 per cent in 1950 to 29 per cent in 2016, despite railways being the most economical choice for transporting bulk cargo.
A mere 2 per cent of the total roads in India, national highways (115,435 km), carry about 40 per cent of the road traffic. Further, the current growth of road creation is significantly lesser than the vehicular growth. This leaves ample room for expansion in capacity.
NHAI- The author of the growth story
NHAI, as an institution, has done a phenomenal job in building the national highways network. As private sector participation weaned post FY12 and Engineering, Procurement and Construction (EPC) became the mainstay from FY14 to FY16 for new highways, NHAI has re-invented PPP through innovative models.
To revive the interest of the private sector in building highways, NHAI introduced HAM in FY16. Until March 2018, NHAI has awarded over 100 HAM projects, comprising more than 6,000 km and Rs 1,260 billion of the project cost. HAM formed 46 per cent of total length and 63 per cent of project cost of total NHAI projects awarded in FY18. While initially developers and lenders were reluctant, the model has thereon got established with a strong commitment from NHAI and a large pipeline, resulting in intensified competition. These projects have witnessed strong appetite from new bidders and has led to the emergence of regional and small and mid-sized players.
Some of the active bidders have won a large number of projects, so much so, that the cost of projects won adds up to over three times their annual revenue. A natural corollary to this is that some of these bidders would move out of competition for future projects.
Another interesting initiative of NHAI is the asset monetisation programme, the TOT scheme. The first TOT award of 648 km was awarded to Macquarie Group for a value of Rs 96.81 billion, which is more than 1.55 times NHAI's initial estimated concession value. Encouraged by the success of the same, NHAI has initiated the second TOT auctionû587 km across the states of Rajasthan, Gujarat, Bihar and West Bengal with an initial estimated concession value of Rs 53.62 billion. While the TOTs are a key fundraising avenue for NHAI, it could indirectly impact the M&A activity in the sector, with many traditional buyers seeking large TOT opportunities.
The next engine for growth envisaged by NHAI is the Bharatmala Pariyojna. With an aim to replicate the significant success of the Golden Quadrilateral programme, the government announced this flagship programme in October 2017. It entails building 60,000 km of roads to create 50 economic corridors and connect 550 districts in the country through highway linkages at a cost of Rs 8 trillion. Assuming 60 per cent of this planned outlay is executed through HAM mode, Rs 1.9 trillion will be required to be funded by the developers and the lenders (i.e. after considering 40 per cent of outlay as grant during construction). Considering funding at 75:25 D/E ratio, Rs 1.4 trillion will be required as project debt and Rs 482 billion equity funding. As a comparison, as of FY18, total bank credit to the road industry is Rs 1.6 trillion. So, the availability of adequate funding will be one of the key determinants of the programme's outcome.
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Authored by Srishti Ahuja Taneja, Partner, Transaction Advisory Services, Ernst & Young.