Foreign investors favor India roads and transmission — and little else

Data InsightInside Infra 5 October

Foreign investors favor India roads and transmission — and little else

Investors including the Canada Pension Plan Investment Board (CPPIB) and Kohlberg Kravis Roberts (KKR) are keen to bid for Indian transportation and power transmission assets, which are part of a INR 6trn (USD 73bn) pipeline of infrastructure concessions that will be handed out through 2025.

Highways have already contributed the most - INR 292bn - to the programme since February 2018, when Macquarie Group won the right to collect toll for a bundle of nine roads. Transmission comes second with INR 77bn, and ports are third with INR 15.9bn of projects awarded, according to data compiled by Infralogic. The National Highways Authority of India aims to offer more than 25,000km of roads to raise INR 1.6trn through March 2025, according to the pipeline document. The Power Grid Corporation wants to gather INR 452bn from 28,608 circuit km (ckm) of transmission lines.

The Narendra Modi administration, voted into power for a second term in 2019, has made asset recycling a cornerstone of its infrastructure policy. Besides Macquarie, the government has awarded concessions to Cube Highways and Caisse de dépôt et placement du Québec (CDPQ), as well as to local developers. Apart from the country’s clear need for infrastructure, transportation and electricity transmission carry long-term concessions and there are a large number of operating projects, says Kavita Saha, CPPIB's managing director of infrastructure in India.

"The segments we consider attractive are transportation roads, ports, airports and utilities, mainly transmission," Saha told Infralogic. "The former is attractive based on India’s key investment themes of GDP growth, increase in consumption and urbanisation. The latter is attractive as the government builds the backbone to India’s 2030 renewables targets of 500 GW."

KKR plans to seek investments with compelling risk-adjusted returns, said Partner and Head of India Infrastructure Hardik Shah, although he did not elaborate. The private equity major recently bid for a 73km highway concession in the toll-operate-transfer (TOT) model.

"The uncertain global macro environment we see today makes some types of infrastructure assets - such as roads - compelling investment opportunities, given their ability to partially hedge against inflation,” Shah said. India's additional positives include a stable policy environment, a successful track record of public-private partnerships (PPPs) and clear targets set out by the government, he added.

Toll road concessionaires increased rates by between 8% and 12% in this fiscal year that began in April, based on the country's wholesale price index (WPI) to which they are linked, said Anand Kulkarni, director at CRISIL Ratings, S&P Global’s Indian arm. The WPI has remained above 10% over the past nine months, coming in at 12.41% in August, according to official data. For roads awarded after 2008, toll rates are allowed to increase by 3% plus 40% of the WPI.

Combined with the rate increases, Kulkarni expects revenue for toll operators to rise by 14%-16% this fiscal year amid a 5%-7% growth in traffic volume – which is historically correlated to economic growth. CRISIL expects gross domestic product (GDP) will expand 7.3% this fiscal year, compared with 8.7% in the 12 months through March 2022.

NHAI Chief General Manager of Finance BM Rao said the annual revisions in toll rates and increasing traffic offer steady returns, usually preferred by long-term investors. In June, the NHAI published a list of 14 roads spanning 1,750km (see table) that it intends to auction through March 2023 to raise about INR 350bn-400bn, a government source then told Infralogic, the most in a single year since it started handing out concessions in 2018. It plans to add more roads to the list, sources told this news service earlier this month.

Airports going slow

India’s third round of airport privatisations – the first two rounds were in 2005-06 and 2019 - has been delayed by about four months already. Adani won contracts for six tier two facilities in the most recent auction while the previous round involved major aerodromes at Delhi, Mumbai, Bangalore and Hyderabad.

The National Monetisation Pipeline document had set a timeline ending March 2022 for bidding out six more airports.

“Every update I’ve had on timeframes comes and goes without any news from the sell-side,” an international consultant advising a potential bidder told Infralogic. With a long waiting period between first being touted and documents actually being released, most investors know not to get too excited too quickly, says the consultant, who has worked on Indian projects for about a decade.

Zurich Airport International Managing Director Daniel Bircher says India’s stable regulatory environment, a strong financial industry and its economic growth are favourable factors and that it is closely watching the privatisation process.

German multinational Fraport says it considers Asia to be one of the best regions in the world as it offers promising opportunities for air travel growth.

Boeing said in March this year that it expects air travel in South Asia to increase 6.9% annually through 2040. This means that the region’s fleet will nearly quadruple, with India representing about 90% of passenger traffic, it stated in the report.

According to KPMG, assuming every member of India’s 350 million middle class makes an average of two air trips a year, eminently possible in this decade, passenger throughput should increase by three times over current levels.

As the Indian government prepares to bundle airports for bidding, Fraport suggests these should be “attractive, viable package that enables synergies for operating and developing the airports of that package” instead of just bundling one profitable airport together with a smaller facility.

A senior official at India’s civil aviation ministry told Infralogic the government is still finalising the list of assets that will be offered. So far, it has grouped 11 facilities into five bundles, four of which comprise of one large and one small airport.

The fifth package is made up of an airport at Varanasi paired with the smaller Gaya and Kushinagar airports, all in Uttar Pradesh state. The airports have obvious synergies, the official said, adding that all three places attract domestic as well as international tourists - many of them religious pilgrims - and the expansion of the airports will help tourism and airline operators to better package the destinations. The three towns are closely associated with Buddhism and Hinduism.

Power grid

Last year, CPPIB and US-based Capital Group were among a group of investors that invested INR 34.8bn in India’s first government-owned power transmission trust. CPPIB’s share was INR 8bn.

As of 31 March, 2019, the transmission asset base in India aggregated to a total length of 413,407 circuit kilometres, registering a compounded annual growth rate of 7% since 2015. The central government owned 38% of the network.

KKR, which is a majority shareholder in IndiGrid, a power transmission trust set up by Mumbai-based developer Sterlite Power, says it sees the pipeline as an important avenue of credible investment opportunities.

“We are optimistic about India’s infrastructure investment outlook and will continue seeking out opportunities through the private market as well as government sources such as the National Monetisation Pipeline,” says Shah.


Railway concessions, which make up 25% of the pipeline of concessions, have not attracted interest, with a move to bid out 109 routes drawing just two proposals. Both were from local companies - one of them state-owned - together offering an estimated INR 72bn. The winning bidder said it will share just 1% of its revenue. The government had expected to draw in investments of about INR 300bn.

The lack of an independent regulator in the railways sector is a key issue, especially in the context of a PPP being tried out for the first time, says Sudhanshu Mani, a consultant and former general manager at state-owned rolling stock manufacturer Integral Coach Factory. Currently, the Indian Railways is the procuring authority and acts as the industry regulator as well.

The Indian Railways did not respond to a request for comment on what it plans to do next.

A second failure was in the telecommunications sector, when authorities drew a blank for a INR 294.3bn tender calling for investors to upgrade, operate and maintain a government-built network. The procuring authority, Bharat Broadband Network Limited, did not respond to a request for comment.

Other segments within the pipeline of concessions include power generation, warehousing, mining, oil and gas pipelines, ports, sports stadiums and urban real estate, with each of these making up 2% to 7% of its total value.

For assets like sports stadiums, investors will want to know the different revenue streams such as a fixed schedule of matches, events and sponsorships, said Sajal Kishore, managing director and head of Asia-Pacific infrastructure and project finance ratings at Fitch Ratings.

Projects involving sports stadiums can have multiple income generating avenues, he says, adding that sports infrastructure and PPP contracts in the sector in India are in their nascent stages.

Caisse de dépôt et placement du Québec’s (CDPQ) India Managing Director Saurabh Agarwal says private participation by foreign financial investors has so far been limited largely to roads and renewables.

“More than anything else, any serious investor would like to know the long-term plans of the government around potential opportunities so that they can plan how they invest their time and resources,” he said. “Any one-off opportunity - even if it is good - is unlikely to attract much interest from serious players without visibility on the long-term opportunities in the sector.”

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