NHAI The Real ‘Winner’ In TOT Road Monetisation

NHAI The Real ‘Winner’ In TOT Road Monetisation


Results for the first round of bidding for the much-awaited toll-operate-transfer model projects have been announced by the National Highways Authority of India. And, much to the NHAI’s excitement, the resultant winning bid has been well above expectations. An NHAI official said it was over 50 percent above what was expected, but it’s actually even higher.

The NHAI expected a concession value of Rs 6,258 crore. Assuming a leverage of 70:30, a conservative norm for such projects, NHAI’s expectation for the equity value of this bundle of concessions was approximately Rs 1,877 crore. The winning bid from Macquarie, the global leader in infrastructure investment and management, at a concession value of Rs 9,681 crore translates to almost three times the equity value estimated by the NHAI.

On a per-kilometre basis, while the NHAI expected a value of Rs 9.67 crore per kilometre, what it’s got is 55 percent higher at approximately Rs 15 crore per kilometre.

These roads from the NHAI have been operational for some time and therefore command a premium over cost incurred by NHAI in developing and constructing these. The NHAI’s expectation of Rs 9.67 crore per kilometre presents a premium of about 30 percent over an estimated capital expenditure of Rs 7.5 crore per kilometer for such road projects in India – that is, it would cost approximately Rs 7.5 crore per kilometre if a developer were to build a new road today.

Therefore, the winning bid is twice the estimated capex, and almost three times estimated equity.

Great news for the NHAI indeed.

Workers labor on a construction site in New Delhi, India, on  Dec. 4, 2017. (Photographer: Anindito Mukherjee/Bloomberg)
Workers labor on a construction site in New Delhi, India, on Dec. 4, 2017. (Photographer: Anindito Mukherjee/Bloomberg)

However, is it a bid that’s too aggressive? The second highest bidder quoted Rs 7,511 crore or Rs 2,170 crore lower than the winning bid. Seen another way, Macquarie quoted almost 30 percent more than the second in the race.

One is reminded of the heady days, not far back, when there used to be similar aggression in ‘winning’ infra projects across road and power sectors in India. As highlighted in my first article on the subject, it turned out that these were overly-aggressive, and for projects with big construction risks. Many of these projects got stranded for reasons essentially around faulty assumptions and a lack of alignment of interest over the long term economic life of these assets.

This time around though, the situation is different. These are operational – up and running, cash-generating – assets with no construction risk other than capex owing to basic and periodic maintenance of the roads. So, the risks for the bidders have been limited to a judicious assessment of cash flows over the long-term (30 years) and an appropriate discounting to arrive at a fair value. This essentially means basic assumptions around traffic and cost of capital.

How do you explain the largest infrastructure fund manager in the world putting in a bid that was so much higher than the second-highest bidder, and handsomely exceeding the seller’s expectations? For global institutions like pension funds, insurance companies, sovereigns invested in several Macquarie funds, do the answers lie in wrong assumptions or smarter sourcing of capital (debt) by the fund manager? Or perhaps a bit of both? Only time will tell. For now, it certainly looks like too much money left on the table by the ‘winner’. The NHAI isn’t complaining. This is a great template for monetisation of public assets by the Government of India.

Ajay Jain is Managing Partner at Indusbridge Capital Advisors and has been a senior advisor to Brookfield and the World Bank’s International Finance Corporation.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

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