The success of the government’s ambitious highway asset monetization programme, a critical component of the National Monetization Pipeline (NMP), will depend on several factors, including the attractiveness of the assets, the duration of the concession, the institutional dispute resolution mechanism and, above all, the leeway given, experts said. for the private sector to operate such assets.
The target to raise 1.6 trillion rupees during fiscal year 22-25 through the road monetization program – roughly 27% of the 6 trillion rupees required to be raised through the NMP – is a strict target given previous experience, which was a mixed bag for National Highways Authority of India (NHAI).
Under the asset monetization program, NHAI awards publicly funded operating projects on a long-term basis to patient capital and another group of investors. Bidders recover the investment by charging fees over the lease term, generally between 15 and 30 years.
Since October 2017, NHAI has submitted bids for three Operation and Transfer (TOT) packages – one, three and five – successfully, raising Rs 14,700 crore. However, the second and fourth packages received a lukewarm response and were canceled. Packages six, seven and eight, are currently in the bidding process. These packages have been kept smaller to attract local capital. NHAI is also looking to raise INR 5,000 this year through its Infrastructure Investment Fund (InvIT).
According to rating agency Crisil, NHAI’s funding needs are expected to double to “$10 trillion over the next five years compared to the previous five. “If these funding requirements are met, we estimate that NHAI could build about 25,000 kilometers of national highways on fiscals 2022-2026P, compared to 17,228 kilometers on fiscals 2017-2021.
Thus, the successful monetization of the Rs 1.6 crore road pipeline is critical as it is likely to meet 15% of the NHAI fund requirement during FY 2022 to 2026P, compared to less than 5% during FY 2017-2021E.
Crisil’s analysis of NHAI’s asset pool of 300 national highway projects (across 25,000 km) indicates that 65% of the sample set (in km) has recorded medium to high toll growth of >15% since commissioning. Approximately 31% of projects (in kilometres) had > Rs 70 lakh revenue per kilometer in FY 2020 (pre-pandemic), with >15% growth in fee revenue over their history, in line with the three TOT packages that were successfully invested . away from NHAI.
The agency said a number of factors will determine the outcome of the agenda, including the projects’ attractiveness from the point of view of future revenue generation potential. The operational experience of the players in the operation and maintenance of highway assets and the frequency with which these assets are offered by the government at the required valuation will also be important.
On a cautionary note, ICRA’s Rajeshwar Purla says, “Forecasting traffic over a period of more than 20 years is challenging due to the dynamic nature of the business, particularly the potential upgrade of multiple networks. Moreover, there has been a trend towards alternative ways of reducing logistics costs and lowering emissions carbon. These would also lead to a conformational shift.”
Noting that asset maintenance has been affected by the pandemic, he says, “Asset quality is of paramount importance, as poor regular maintenance will lead to significantly higher maintenance costs.”