Road rage on deal street: Changing landscape of highway construction biz

$11.3 billion worth of highways have changed hands since 2019, and road construction has moved out of the isolated universe of thekedars to embrace fund managers in fine suits

For the traditional contractor who started decades ago, road building has been a straightforward affair: Get the theka (Hindi for contract) and rake in the moolah.
 

“We get the theka from the corporation and we do the work. That’s it. We don’t understand this buying and selling business too well,” says a sub-contractor who does minor road works in Ghaziabad’s Sahibabad area.
 

The bigger players would be engaged in slightly more complex contracts, but follow the same straightforward strategy.
 

Today, the massive infrastructure deficit in India and need for significant fund injection has led to a maturing of the highway sector, with fund managers in fine suits and financial institutions with deep pockets becoming active in a commercial model looking more lucrative with each passing day.
 

Developers now have far more autonomy and rights over roads in concession-based agreements, primarily by the National Highways Authority of India (NHAI). The NHAI allows them to pocket a share of the toll revenues directly or indirectly, depending on the project award method. 

This allows them to buy and sell commercially operational highways, which has made the sector a hot space for big-ticket deals. According to data by EY India, $11.3 billion worth of highways have changed hands since 2019 across the Centre, states, and the private sector (see chart).
 

Welcome metamorphosis
 

These highway projects span over 20,000 lane kilometres, according to Srishti Ahuja, Partner, Investment Banking, EY India. Many of these transactions involve foreign institutions, with no background in infrastructure, as models such as Toll-Operate-Transfer (TOT) and Infrastructure Investment Trusts (InvITs) allow them to partake in highway investments with the responsibility of operations and maintenance (O&M) resting with another agency.
 

“As India executes its massive highway build out plan, which exceeds the highway network of the whole of Europe, increase in transaction activity has been a natural outcome. As an example, the total capital investment (including public and private) was $36 billion in just FY24, so capital recycling is a key source of financing this outlay,” says Ahuja.
 

In the interim budget for 2024-25, the Centre allocated Rs 11.1 trillion for infrastructure, 11 per cent more than 2023-24.
 

“A large majority of capital expenditure in the highway sector is getting recycled at this point. It is a model that allows for infrastructure to be expanded without the companies having to manage new capital of proportionate size, as old capital gets quickly recovered through bundled asset sales. Otherwise, the returns of these projects would be visible over a space of 15-20 years, depending on the concession period, increasing dependence on debt, and limiting a contractor’s ability to take on new projects,” a New Delhi-based lawyer active in infrastructure transactions said.
 

For perspective, the Central government has been focusing on pumping in more capital to revive private capex, which plummeted in the aftermath of Covid-19. Calling private capex “an aircraft already in flight”, India’s Chief Economic Adviser, V Anantha Nageswaran in November cited the rising capex by infrastructure companies as a positive sign.
 

The latest form the industry has taken allows for a clear understanding of focus areas and return structures, according to experts. The highways authority can focus on planning and awarding of projects, without worrying about operations and maintenance. Contractors can infuse quick capital for future projects by selling road assets to a trust (often sponsored by the developer itself) or company, instead of waiting out the often long gestation and concession periods of these assets, and institutional investors, especially patient capital, can reap the rewards of Indian infrastructure without having to spend decades building expertise in construction.
 

Driving deal street
 

According to experts, InvITs are emerging as an attractive investment tool for large institutional yield investors, who contributed $3 billion. Today, more than half of InvITs registered with the Securities and Exchange Board of India, the markets regulator, are for highways and all these InvITs are aggregating assets through mergers and acquisitions.
 

According to a report by SBICaps, the length of highways owned by InvITs, which was a little more than 10,000 km in 2023-24, will rise to 25,000 km by 2027-28. Ahuja of EY India believes assets under management with InvITs will double to $34 billion in the next two years.
 

The NHAI’s asset monetisation through the TOT framework contributed $5 billion during this timeframe. This is expected to grow further, as the NHAI’s monetisation plans account for a quarter of the National Monetization Pipeline. 

Between FY21 and FY24, the Hybrid Annuity Model (HAM) accounted for 55 per cent of all highway awards by volume, and regular contract-based works, called Engineering Procurement Construction (EPC) projects, have accounted for 44 per cent of the contracts. 
 

As the highway sector became risk averse in the aftermath of a near-NPA crisis, the Centre has not found many suitors for its private highways programme – the Build Operate Toll (BOT-Toll) model. With an overhaul in the terms of BOT contracts, companies and analysts alike expect activity to spur under this model. 
 

The highway authority has identified BOT projects worth Rs 2.2 trillion to be bid out in the near to medium term. The reliance on EPC and HAM over the past years has resulted in a Rs 3 trillion debt for NHAI, which it has been offsetting by avoiding lenders entirely for the past two financial years. The Ministry of Road Transport and Highways already has plans to significantly increase the share of concession-based highway projects, such as BOT, TOT, and HAM, starting the current financial year.
 

With a healthy pipeline of EPC projects currently in the NHAI’s kitty, it has significant headroom to flip many of these toll-collecting roads into InvITs, or a TOT bundle. For new projects, the authority will focus on BOT-Toll and BOT-HAM (aka HAM).

What lies ahead
 

Global investors see a robust PPP framework, long concessions with inflation-linked escalation (which is a good hedge for currency depreciation), and proven examples of large profitable exits for other large global peers in Indian highways. Real assets investors are allocating more capital to Asia and India is a significant beneficiary of that, as the market offers size and a mature investment environment.
 

For example, while private equity and venture investment in India witnessed a decline last year driven by global cues, real assets saw a robust 23 per cent increase.
 

“Indian highways, as an asset class, will continue to see growing deal activity. I anticipate $25-30 billion of transactions in the next five years. This will be driven by focused policy measures, like building over 200,000 km of national highways by 2037, the pre-election Budget of 2024-25 allocating $33.5 billion for highways outlay, and the ministry’s aim to eliminate two-lane national highways,” says Ahuja.
 

The investment thesis will largely remain the same: The NHAI and Indian developers will take the greenfield risk and assets, as they see stabilised operations and traffic, will attract interest from yield investors and asset managers. Though HAM projects will drive the deal volume, deal values will be driven by TOT and BOT Toll projects.

• Road asset transactions worth $11.29 billion have taken place since 2019. These include private-to-private transactions and private concessioning of government projects by the National Highways Authority of India through its toll rights model and infrastructure investment trust (InvIT)

• 20,000 lane kilometres of roads have been involved in these deals