International pension funds with the appetite to park investments for several years are expected to be the primary suitors for the highway contracts to be auctioned next month by the National Highways Authority of India (NHAI).
Experts believe that the government’s rationale behind the proposed auction is to generate cash to financially support its next tranche of investments in the highways sector.
They are of the view that the foreign pension funds would be keen to bid for such projects as they typically invest for a longer duration, unlike private companies that are looking for instant results.
“Since most of the construction-related risk is taken care of by the government, the private sector would be interested in these contracts because the traffic is already established and the government is hopeful of getting surplus cash post auctions,” said Adil Zaidi, Partner-Economic Development and Infrastructure Advisory at EY.
He added that the government should plan the highways and alignments that it intends to auction otherwise it would lead to a hue and cry.
During previous consultations with the government, the pension funds and sovereign wealth funds had suggested that the financial packages to be offered by the government should be large in size.
For instance, of the 11 projects that are likely to be auctioned in the first round of auctions in August, a particular pension may be interested only if it wins at least three or four such contracts. The total value of these projects should not be less than $200 million, otherwise, the contracts become unattractive for these players.
Another reason that may entice global pension funds to park their money in these highway contracts is a certain expectation on the RoE (Return on Investment) front, an analyst said.
Last year, the Cabinet Committee on Economic Affairs authorised NHAI to monetise 111 public-funded national highway projects that are operational and are generating toll revenues for at least two years after the Commercial Operations Date (COD) through the Toll Operate Transfer (TOT) Model.
Around 75 operational national highway projects completed under public funding have been preliminarily identified for potential monetisation using the TOT model.
This model would provide an efficient operation and maintenance (O&M) framework requiring reduced involvement from the NHAI in projects after the completion of construction. Further, the corpus generated from proceeds of such project monetisation could be utilised by the government to meet its fund requirements for future development and O&M of highways in the country. This could address development and strengthening of highways in unviable geographies.
The government aims to cater to a category of investors that is averse to taking construction risks but is adequately equipped for making long-term investments in road infrastructure. These include institutional investors, including pension and insurance funds, and sovereign funds, among others.
In the past, Macquarie, Brookfield, Cube Highways, and other such global funds took equity in national highway projects worth Rs 4,150 crore from which private promoters had exited.
The auction can also be seen as a move to allow the entry of sovereign funds from Abu Dhabi and Qatar into such projects.
