Second bundle of Indian roads fails to fetch minimum price

The country’s highways authority will have to choose between accepting a bid that’s lower than its base price of $766m or restructure and re-tender the bundle of eight toll roads.

After privatising nine toll roads last March at a price that exceeded its expectations, the National Highway Authority of India may need to go back to the drawing board and restructure a second bundle after attracting bids that were below its minimum of $766 million.

“If the bundle is not awarded [to the highest bidder], it will be restructured by adding and removing some stretches,” an NHIA source told Infrastructure Investor.

The highest bid of $650 million for the latest bundle, which comprised eight highways totalling roughly 587 kilometres and was put on the block last August under a toll-operate-transfer model, came from Cube Highways, an India-focused road operator created by I Squared Capital and the International Finance Corporation. Indian developers Adani and IRB Infrastructure Developers also submitted bids.

NHAI’s management board will take a final decision on whether to award the bundle before the end of February, the source said.

A second source close to the government acknowledged that awarding the bundle at a lower price “would be difficult to justify”.

Similarly, an Indian analyst said that a downward revision of the base price “was unlikely.” “It would set a wrong precedent,” Rajeshwar Burla, assistant vice president at India’s ICRA credit rating agency, said.

The setback comes nearly a year after Macquarie was awarded a 30-year concession to toll and operate a bundle of nine highways, bidding $1.5 billion or 50 percent higher than NHAI’s original target.

“The traffic density [of the roads comprising the second bundle] is lower and consequently, the average toll collections are lower […] when compared to the first bundle,” Burla said.

According to the NHAI source, a tightening credit market and rising interest rates in India were factors that dampened investor appetite.

At the same time, assets that recently came to market may have also increased competition and impacted NHAI’s plans. Troubled Indian infrastructure financier IL&FS is aiming to sell as quickly as possible 19 assets totalling 8,346 kilometres of operational roads in the country, in an effort to pay down more than 910 billion rupees ($12.7 billion; €11.7 billion) of debt.

The failed auction underlines the challenges that the agency faces as it tries to raise $20 billion through an asset recycling programme comprising more than 100 domestic roads.

It is unclear how the current impasse might affect NHAI’s overall monetisation programme.

According to ICRA’s Burla, the success of the first auction “raised NHAI’s expectations” regarding its second bundle. The agency will be “more realistic going forward,” he added.

“[The toll-operate-transfer model] offers good opportunities to long-term institutional investors including pension, insurance and sovereign funds who are bullish on [the] long-term growth story of India and are keen on acquiring mature assets,” Burla continued.

“As long as the IECV [initial estimated concession value] is realistic, the interest from investors will continue to exist,” he added.

Cube Highways, Adani and IRB Developers did not respond to requests for comment.