An NHAI IPO, the possibility of which was indicated by roads minister Nitin Gadkari, would be a giant leap in providing funds to a sector that is heavily reliant on budgetary support. Photo: Priyanka Parashar/Mint

NHAI’s toll-operate-transfer model: More funds, more opportunity in roads

While an NHAI IPO is some time away, it hopes to mop up about Rs6,000 crore by auctioning existing road projects under the toll-operate-transfer model

With roads at the centre of infrastructure development, the National Highways Authority of India’s (NHAI’s) decision to tap funds through innovative methods brings hopes of new orders for developers.

Apart from policy logjam and clearances for smooth project execution that’s being put in place, steady fund flow is another challenge in infrastructure.

Indeed, Union minister Nitin Gadkari’s statement of coming out with an initial public offering, or IPO, of NHAI would be a giant leap in providing funds to a sector that is heavily reliant on budgetary support.

But that maybe some time away.

In the near term, NHAI hopes to mop up about Rs6,000 crore (in the first round) by auctioning existing road projects under the toll-operate-transfer (TOT) model. The premise here is to collect funds upfront from interested parties against a stream of cash flows from toll revenues that would be assigned to them for a continuous period of say 30 years.

For NHAI, such measures would help reduce reliance on only budgetary support and debt, which it taps through its annual bond issuance. The TOT model will bring in direct participation by insurance and private equity firms that have access to cheap funds. Since existing and operational roads would be auctioned under TOT, it does not need developers with construction skills to participate. Reports suggest that several overseas financial firms are also interested. In a sense, this also reduces direct reliance on banks in the initial stages of road development, given that banks are still reeling with stressed assets as a result of stuck legacy projects.

NHAI’s dynamic funding approach is also mirrored in its switch from engineering-procurement-construction (EPC) to the more recent hybrid annuity model (HAM). Unfortunately, there have been delays in financial closure as banks continue to shy away from the infrastructure sector.

Be that as it may, the roads segment has been the most innovative in its access to funds and robust in ordering out, within the infrastructure universe. Participation of various kinds of developers is gaining traction as there is a return of confidence. For instance, relatively large firms such as PNC Infratech Ltd and Dilip Buildcon Ltd won road contracts under HAM. Meanwhile, the mid-sized firms, with nearly half of them in the unlisted domain, are active in EPC road projects.

Although so far the focus has been on awarding road contracts, the TOT model can throw open a huge asset portfolio of existing roads, mainly highways under NHAI. According to Shubham Jain, vice-president and sector head-corporate ratings, ICRA Ltd, “The money (about Rs6,000 crore) raised would be used by NHAI for annuity payments and future EPC projects."

This is good news for road developers, too, as it will translate into more orders from NHAI. Already most of the front-runners in the sector are flush with order books that are two-to-three times the FY17 annual revenue.

The only glitch to sustained investor interest in the TOT model is stable or growing toll traffic, which hinges on a recovery in the economy.