As the world's second-most populous country, India owns the world's second-largest road network. At 4.7 million kilometres (km), it trails behind only the US' 6.59 million km road network. But Indian roads, which were already an enticing investment opportunity, are about to get better.
In August, Prime Minister Narendra Modi's government, hoping to mobilise increased private investment in the sector, implemented a policy change that allows road developers to divest 100 percent of their operational assets. Previously, developers of road projects signed before 2009 had to keep at least a 26 percent stake in the projects they originated.
The move is expected to unlock as many as 80 new assets worth about $680 million. Roads made up some 20 percent of overall infrastructure investments during the country's 11th Five-Year Plan (2007-2011), with actual investment in roads 10 percent higher than expected, due to an increase in central and state government spending.
Between 2010 and 2014, private capital invested about $757 million in 11 road and highway projects in India, according to consultancy Grant Thornton India. India's Planning Commission has projected that infrastructure investment will almost double to $1 billion in the 12th Five-Year Plan, which runs from 2012 to 2017.
That number demonstrates the urgent need for the government to attract substantial amounts of private sector capital.
Unsurprisingly, after the new policy announcement Canadian investor Brookfield Asset Management made the largest single asset acquisition in Indian infrastructure, picking up six roads and three power projects.
Indian investment manager IDFC Alternatives is reportedly in talks with developers to acquire stakes in operating road assets and has set-up a special purpose vehicle to manage them. The likes of Morgan Stanley , JPMorgan , Ontario Teachers' Pension Plan , Dutch pension manager APG , Government of Singapore Investment Corporation and Singaporean state-run investment firm Temasek Holdings are also said to be evaluating investments in Indian projects.
Before recently setting up a Mumbai office, the Canada Pension Plan Investment Board invested $332 million in L&T Infrastructure Development Projects, the owner of India's largest toll road concessions portfolio, spanning 19 toll roads across 2,200 km.
MK Sinha, IDFC Alternatives' managing director and chief executive, explained that although traffic risk is usually considered the biggest challenge to highway operators, India's roads sector is something of an exception. In fact, toll collection data by the National Highways Authority of India revealed that over 40 percent of toll projects are currently generating more than 10 percent of the project completion cost annually.
To attract more private investment to the roads sector, the Modi government is preparing to roll out a number of publicly-funded operating toll roads to private sector entities under the toll-operate-transfer model. It aims to monetise these assets to release funds for the construction of new highways across the country.
The government has shortlisted a number of potential projects and has undertaken studies to define the scope of the concessions and lower barriers for new entrants and investors. But while private investors are eyeing operating road projects, they are notably absent from greenfield road development.
Sinha explained that the predominant risk in the sector revolves around land acquisition for new or existing road expansions. “Concessionaires have learned the lessons from the past five to seven years when many projects were delayed and shut down due to land acquisition problems,” he said.
Time will tell if the government will retain its leading role in developing new roads. In the meantime, we will almost certainly see private investors line up to snap those new operating road projects.