Concentration risk could hurt India’s toll road tenders, analysts say

The National Highway Authority of India is aiming to raise over $1bn through the privatisation of two bundles of roads.

Concentration and political risks might deter investors from considering the next two bundles of toll roads offered by the National Highway Authority of India, two analysts have told Infrastructure Investor.

The NHAI is currently tendering its third and fourth bundles of toll roads, which comprise nine and seven assets, respectively. The government agency’s initial price for the third bundle stands at 49.9 billion rupees ($705 million; €635 million), while the fourth package is valued at 41.7 billion rupees.

Rajeshwar Burla, vice-president and associate head of corporate ratings at rating agency ICRA, said 35 percent of the revenue for the fourth bundle came from a single route, the Pimpalgaon-Nashik-Gonde stretch, in the state of Maharashtra.

“PNG could be Achilles’ heel for the fourth [toll-operate-transfer] bundle, given its chequered history of political agitations disrupting toll collections. That resulted in the termination of the concession agreement by the earlier [build-operate-transfer] concessionaire,” said Burla.

“As far as the success of the fourth bundle is concerned, a lot would depend on how investors view the PNG [stretch].”

According to documents posted on NHAI’s website, the PNG stretch is expected to generate over 1 billion rupees of revenue as of August 2039. The second-best performing asset in the bundle would generate 534 million rupees in the same period.

Devayan Dey, director at the capital projects and infrastructure division of PwC India, added that the geographical spread of the fourth bundle, with assets located in five states, might also make it less attractive for operators.

“The third bundle is more sustainable, with several assets closer to each other,” he said.

Dey believes the third bundle will receive a healthy response from the market, but Burla warned of concentration issues in the package. “Revenue concentration is high with one single stretch – Madurai-Kanyakumari – accounting for around 45 percent of the total toll collections of the bundle,” Burla said.

Failed tender

In January, the NHAI shelved its second bundle of toll roads after the three submitted bids failed to match the minimum price asked by the government.

Despite this, Burla said the initial price tag for the third package stood at a moderate level in relation to its annual toll collection. “This makes the bundle relatively more attractive than the second one, and has the potential to garner a favourable investment response,” he said.

The deadline for submitting bids for the third bundle of toll roads is this Thursday, while investors have until 14 January to file their offers for the fourth group of assets.

The auction process arrives amid calls for the agency to speed up the monetisation of its assets, in order to raise capital to keep developing new projects.

“Road infrastructure has become financially unviable; private investors and construction companies are withdrawing from greenfield projects,” India’s prime minister, Narendra Modi, said in a letter to the Ministry of Road Transport and Highways, according to India’s Livemint website.

“In case of not being able to raise capital through these bundles, the NHAI might face funding issues, mainly due to the liabilities arising from HAM projects,” said Dey, referring to projects implemented under the Hybrid Annuity Model, through which the agency finances 40 percent of the construction of a project.

Despite this, the analyst argued that the tendering of TOT bundles is “a learning process” and would not deter the agency from continuing to monetise its assets.