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Finance Minister Arun Jaitley on Thursday announced that state-run companies and the National Highway Authority of India (NHAI) could use infrastructure investment trusts (InvITs) to raise capital.
Industry experts say this would work well for engineering, procurement and construction (EPC) road and power transmission projects. However, the process might involve difficulties in separating assets.
Also, industry officials and experts believe the move will face some initial hiccups. In addition, the government might need to make the instrument more attractive to investors, given the performance of two existing InvITs has been disappointing. “For InvITs to realise their true potential, the government needs to ensure a wider participation of investors by reducing the minimum trading lot, increasing the leverage cap on borrowings, and encouraging further participation of insurance companies and the EPFO,” said Pratik Agarwal, chief executive officer, IndiGrid.
There are only two listed InvITs in the country — IRB Infrastructure Developers’s IRB InvIT Fund for road assets and Sterlite Power’s IndiGrid for power transmission assets. If the NHAI succeeds with its InvIT plans, the quantum of road assets and the funds raised is expected to be significant. “The NHAI has a huge portfolio and the amount could be staggering. It may be done in phases and the market, too, needs to get more comfortable with this instrument,” said.
K Ravichandran, senior vice-president of ICRA. “It is slightly easier for listed companies, but the NHAI is not a company. There may be some book-keeping issues, but that should not be a serious concern.”
Of the various government-owned assets in the roads and power sectors, power transmission projects and road assets built in the EPC model are the likely candidates for an InvIT in the near future.
“A number of energy companies with stable cash flows, such as in the transmission and renewable energy business, have been buying up operating projects that could be readily structured into an InvIT. At this time, it may not be suited for thermal power generators, especially given the risk of declining PLFs (plant load factors) and higher coal prices,” said Kameswara Rao, partner with PwC India.
Power Grid Corporation, with transmission assets that operate 70 per cent of the inter-state and inter-regional networks, will be better placed for an InvIT.
Besides, distribution companies could also consider this option if the unbundling of carriage and content goes through. This could release them from losses incurred from retail supply and give them a stable return on fixed assets, Rao added. “They may supplement it further with a network of electric vehicle charging stations. Those in the larger states, where variability is low and not burdened by past liabilities, could be the ones to attempt it first.”
Sources said the NHAI had been toying with the idea to consider an InvIT for its operational assets for the last few months. The majority of the projects executed under phase I and II of the National Highway Development Programme (NHDP) were EPC ones. These, according to India Brand Equity Foundation, were developed at a combined cost of $11.9 billion. According to the NHAI’s 2015-16 annual report, the total public-funded road length under tolls is 8,595 km.
Shubham Jain, vice-president and sector head, corporate ratings, ICRA, said InvITs would allow the NHAI access to a larger group of investors. “The NHAI is looking at the TOT (toll-operate-transfer) model, where large investors are expected to step in, whereas floating an InvIT allows for more broad-based investors to participate in the equity being sold in the road SPV(s). On the approval front, the NHAI is not expected to face much of an issue. Further, given the debt raised for these projects is at the entity (NHAI) level, segregation of debt for each project may not be required.”