In India, there are numerous possibilities for different modes of transportation infrastructure. Therefore, prioritising the most appealing opportunity is crucial. The National Infrastructure Pipeline, the government’s growth roadmap, calls for a $1,350 billion investment over the next five years. (the fiscal year 2019–2020 to the fiscal year 2024–2025). Approximately $575 billion of this amount is designated for transportation facilities. The remaining is distributed across other infrastructure areas, including energy, irrigation, agriculture, and urban and rural infrastructure.
The private sector’s involvement in developing transportation infrastructure is anticipated to grow in the coming years. Actually, the National Infrastructure Pipeline anticipates $115 billion in private sector investments across transportation sectors over the next five years, demonstrating the possibilities and the need for increased private sector participation. For example, private-sector participation in road projects is anticipated to rise from approximately 15% of total investments today to approximately 40% over the next five years.
Roads
The Bharatmala Pariyojana, India’s most extensive infrastructure investment programme worth over $100 billion, offers the most appealing road investment potential. Over the next five years, an average annual investment of about $45 billion is anticipated in the road sector, which is roughly four times the average annual investment made between 2014 and 2016. Investments are expected to be made in a variety of ongoing programs, with the flagship Bharatmala Pariyojana project, the government-sponsored national highways development program, being the most promising opportunity. Due to the programme’s size and significance, the Bharatmala Pariyojana offers a rewarding opportunity for concessionaires and financial investors:
- Once completed, the Bharatmala Pariyojana road network will serve as the backbone of the country’s national highway network, catering to approximately 70% of freight volume and connecting approximately 550 districts.
- As part of the Bharatmala Pariyojana, shorter greenfield alignments between key economic centres are also being developed. These high-traffic routes have substantial toll potential and will stimulate economic growth in previously underserved rural areas.
- With the country’s long history of tolling on national highways, enforcing tolls on the corridors being built under the Bharatmala Pariyojana will be easier.
- The investment potential of the Bharatmala Pariyojana is both substantial and immediate; the first phase alone includes an award target of 34,800 km and a $110 billion outlay. The National Highways Authority of India (NHAI) has prioritised the rapid implementation of projects under this plan, as evidenced by the NHAI’s robust pipeline of detailed project reports.
- While some of the ambitious targets may not be met entirely, the intent to accelerate execution is clear. The award procedure has become more transparent and efficient as the NHAI’s expertise in engineering, procurement, construction (EPC), and public-private partnership (PPP) projects has grown, thereby improving the investment environment and reliability of such infrastructure projects. Since 2014, more than 32,500 kilometres of road work have been approved and awarded.
Given that the Bharatmala Pariyojana is the single most extensive government road construction programme in India’s history, its projects are anticipated to receive priority support from stakeholders for expedited approvals. This is an important driver for timely road construction and substantially minimises project investment risks. Additionally, with dedicated resources working within government organisations such as the NHAI to improve and proactively manage project execution tracking, as well as significant improvements in land acquisition processes, Bharatmala Pariyojana projects can be a promising area for investors.
Railways
Railway station redevelopment and private train operations are among the most enticing railway business opportunities. Railways’ annual investment will rise by 3.5 times on average over the next five years, compared to the annual investment made between 2014 and 2017. Seven areas offer investment prospects in railway infrastructure. Dedicated freight corridors (DFC) and high-speed and semi-high-speed rail will continue to drive investments in Indian Railways to improve logistics and passenger-handling capability. Station redevelopment is also seeing interesting PPP methods of execution.
To increase private investment and accelerate project execution, Indian Railways has set an ambitious goal of increasing private-sector involvement in significant projects involving passenger and cargo trains, rolling stock, and stations by 2025. The high traffic volume, the quest for better services, and the extensive network make railways a desirable option for investors.
Station redevelopment has been a priority for Indian Railways, spurred by a pressing need to improve passenger amenities and infrastructure at railway stations. Further, capacity enhancement is needed due to rising footfalls at railway stations—more than 100 stations targeted under the redevelopment programme have approximately 16 million footfalls per day, with a CAGR of 7%. Railways intends to leverage private-sector expertise for station redevelopment initiatives, particularly in construction, commercialisation, operations, and maintenance. This subsegment has a high potential for investors, with over 600 stations planned for long-term redevelopment via EPC and PPP projects.
Indian Railways has made concrete steps to become more rewarding to the private sector by introducing concessionaire agreements with much longer lease terms, allowing investors to make a higher internal rate of return (IRR). For example, the Surat multi-modal hub for rail and bus transportation has a lease period of 99 years, while the Habibganj railway station in Bhopal is scheduled to be finished soon with a lease period of 45 years. Railways have also made the concession model more appealing by giving land parcels adjacent to city railway stations for commercial development, citing the stations’ high footfall and prime position as reasons for the high IRR.
Indian Railways also has an ambitious plan to introduce 150 privately operated passenger trains on 100 important routes, with a $3 billion investment in rolling stock and related infrastructure. Private operators will be permitted to operate train services using shared railway facilities, such as tracks and signalling systems, as well as depots and washing lines. Railways intends to privatise passenger train operations in order to provide customers with world-class amenities. The change is anticipated to improve the passenger experience, such as shorter transit times and more modern coaches.
Metros
With the country’s metro network expanding, rail construction and operations offer an exciting chance, with a $25 billion investment pipeline in the next five years. Investments in urban transportation will continue to prioritise the development of mass transit facilities, as well as the improvement of shared mobility and last-mile connectivity. With India’s fast urbanisation, metros are an essential component of each city’s growth.
By 2025, $25 billion in investments for projects in multiple cities are proposed to be put up for bid. Civil and electrical works requiring a high level of domain specialisation would account for 50 to 60 per cent of overall project costs. Private players have already expressed strong interest and involvement in metro rail construction, including through PPP models, construction agreements, rolling stock supply, and maintenance agreements.
Ports
The Indian government’s flagship Sagarmala port-led industrialisation program, with a greater emphasis on inbound and outbound connectivity, offers substantial opportunities. The government intends to develop port-proximate industrial capacities near the shore through the establishment of 14 coastal economic zones across all of India’s maritime states and union territories under this programme. Additionally, 35 potential port-linked industrial clusters in the energy, materials, discrete manufacturing, and maritime sectors have been identified.
With a shift towards the internationally favoured standard of port management under the landlord model in 2016, essential ports gained an opportunity to introduce private-sector investments and improve operational efficiency, paving the way for private players to join the market and help modernise ports.
Further, with the intended development of several passenger and freight terminals along national waterways, inland waterway development has gained traction. These planned waterways would connect 24 states and two union territories, as well as the dedicated freight corridors and the Sagarmala project. These connections would accelerate the movement of goods through a dense multi-modal transportation network, allowing for seamless movement between waterways, dedicated freight corridors, and road travel. The ambitious inland waterway development program, which includes the country’s 138 river systems, creeks, estuaries, and related canal systems, can be used to transport people and cargo both within the country and to neighbouring countries.
Airports
Despite competition from incumbents, plans to open 100 new greenfield and brownfield airports over the next five years provide enough room for multiple players to coexist serenely. Over the last 15 years, India’s aviation industry has experienced unprecedented growth, driven by rising demand for air travel, an increase in low-cost airlines, and the government’s push for improved regional connectivity, including schemes such as UDAN. This sector’s investments will be divided into three categories. First, over the next five years, 100 new airports (a mix of greenfield and brownfield projects) are scheduled to be opened. The push to improve regional connectivity has resulted in a robust pipeline of airport projects nationwide, with numerous possibilities for greenfield airport development.
Because of the anticipated high demand for airport infrastructure, players in this market will prioritise speed of execution and technological superiority. The recent tendering of the management contract for six AAI airports and subsequent award to the Adani Group (with an aggressive per-passenger fee as a bid parameter) shows both private investor interest and opportunity. Similarly, four firms competed for the Jewar airport: Adani Group, DIAL, Zurich Airport International AG, and Anchorage Infrastructure Investments Holding Limited, with Zurich Airport winning the contract.
Despite the competition, the vast possibilities in this sector allow for multiple players to coexist. While big cities will require multiple airports, a more comprehensive development strategy will be required for the next tier of airports, which may not be feasible using conventional stand-alone PPP models.
Infrastructure Gap: Need for a vibrant ecosystem
Government agencies play an essential part in the development of the concessionaire ecosystem. For example, when it comes to brownfield projects like lane expansions or comparatively smaller projects like building local rural roadways, smaller regional players are often more agile. On the other hand, Greenfield airports are almost entirely the domain of a few major infrastructure companies. In both instances, the government can help shape the ecosystem by levelling the playing field for both small regional players and big national infrastructure players.
For example, thanks to stringent service-level agreements and metric-based performance tracking in concession agreements, the Ministry of Road Transport and Highways has modified the qualifying criteria for several road projects with smaller project packages that increase smaller players’ participation without compromising quality. Skukuza Airport in South Africa is an excellent example of how a PPP can be used for small infrastructure projects. For ten years, the airport’s operations were leased to a consortium of businesses, including regional airlines, a resort, and the South African National Parks Company.
Private-sector involvement can improve both project execution and financing; the critical function of the public sector is to create the proper conditions for those benefits to be realised. A solid legal foundation is essential in addition to a proper contractual structure. Infrastructure initiatives are long-term, and investors face significant political risks. Only if investors can trust the legal and political processes will they be willing to commit large sums of funding over long periods of time. Improved safeguards for preventing non-performing assets and methods for rehabilitating non-performing assets can also benefit the concessionaire ecosystem and increase investor trust.
Despite the sector being a monopoly of a few major infrastructure players for the past decade and a half, the Airport Authority of India’s recent management contracts for brownfield airports has enabled many new bidders to join the fray. Agencies can play an important part in creating a robust ecosystem of concessionaires by addressing the concerns of all parties and building a robust framework for tendering and performance-based tracking.
A vibrant ecosystem can be found in the associated non-transport infrastructure space: city or urban sanitation and wastewater treatment. Historically, infrastructure projects have been carried out at the local level, with a variety of contractors in charge of intercepting and diversion work, laying sewage lines, and eventually managing sewage treatment plants. Unfortunately, this resulted in a number of issues, including a lack of monitoring and responsibility tracking, which caused several projects to fail to function as intended. In addition, larger contractors were not interested in completing small piecemeal tasks.
A paradigm shift resulted in the novel’ one city, one operator’ concept, which allowed more significant contractors to assume responsibility for an entire city’s sanitation network. Moreover, mandating the use of technology to monitor operational success and a transparent metric-based compensation system has triggered a transformation in the ecosystem. This has also induced the ecosystem’s ability to absorb more projects by bringing in newer players.
Project Delivery – Quality and Timeliness
Concessionaires and contractors must focus on developing strong capex deployment and project management skills to ensure project completion on time, allowing for faster return realisation. This would necessitate a thorough risk assessment in order to proactively identify construction-related risks and create mitigation strategies. For example, conducting a thorough on-the-ground investigation using advanced techniques such as LiDAR and ground penetration radar before starting the work will allow for more accurate planning and reduce uncertainties during highway project execution. Proactive interaction with government authorities during project execution is also required to resolve risks, minimise delays, and reduce cost overruns.
Financiers
In addition to reassessing the risk-reward spread in the infrastructure sector, financial institutions should work with government officials and concessionaires to create innovative financing products.
Over the last five years, foreign direct investment in India’s infrastructure sector has grown at a CAGR of about 35 per cent. This trend will likely continue because of increased infrastructure spending in the government’s flagship projects. This astounding increase in foreign investment demonstrates that, despite challenges, India’s infrastructure development story is quickly emerging as a compelling investment prospect for global financiers. As new financing and operating models for infrastructure projects emerge, financiers will need to fully assess the risk-return profile of each asset category. To guarantee secure returns and business case viability, the risks and sensitivities associated with collecting user fees, which is the primary source of returns, must be evaluated fairly and transparently.
Given the broad range of new government projects, financial institutions must reassess their investment portfolios, from high-risk projects like greenfield development to those with more secure cash flows like brownfield projects. Financial institutions will also need to be aware of their investment portfolios’ cash-flow cycles in order to balance the risks associated with refinancing, which is usually required in capital-heavy projects.
Given the evolving ecosystem, which includes players ranging from small local businesses to major infrastructure companies, financial institutions must develop products that meet a broad range of needs. They will have to continually bring to innovative market products that meet the risk appetite of concessionaires and government agencies. Additionally, financial institutions must collaborate closely with the government to fine-tune contracting terms and project packaging, as well as create alternate financing choices for asset rotation.
Conclusion
The government primarily executes infrastructure projects using the EPC model. Raising the upfront capital needed to carry out infrastructure projects without jeopardising government finances is a delicate balance. This, combined with the fact that revenues from transportation infrastructure projects are spread out over 20 to 30 years after completion, presents a major cash-flow management challenge. Relying solely on budgetary resources limits the government’s ability to plan and implement big infrastructure projects. Therefore, alternative and innovative forms of capital are essential. For example, the Airport Authority of India is planning a $25 billion investment over the next ten years to achieve targets set by the National Civil Aviation Policy of 2016. Still, it only has internal resources and a government scheme allocation of about $0.6 billion in 2019. The disparity is simply too large to be bridged solely through budgetary allocation. However, the Airport Authority of India’s balance sheet is underleveraged for an infrastructure development authority constructing airports—one of the more viable asset classes within transport infrastructure—with a debt-equity ratio of less than 0.1 in 2019.
Government officials are looking into ways to bridge the capital gap between what is needed and what is available, such as borrowing through bonds and loans, rotating assets, and land value capture financing to capitalise on the increased land value as a result of infrastructure development.
By leveraging government agencies’ balance sheets, there is a large chance to raise additional capital through bonds. For example, Indian Railways recently raised $20 billion from the Life Insurance Corporation of India (LIC) through bonds issued by the Indian Railway Finance Corporation. Similarly, the NHAI raised $3.5 billion from LIC through bonds in the previous year. In addition to raising funds for EPC projects, the government should set in place the proper mechanisms for project selection and phasing.
This will allow for sufficient revenue generation and phased capital deployment to satisfy debt repayment commitments. Although infrastructure development agencies have significant leeway to increase debt on their balance sheets, structuring the terms of the debt (interest rate, moratorium, and tenure) to closely match the project’s cash flow is essential for limiting any short-term cash shortfall and ensuring complete debt serviceability throughout the asset’s life cycle.
To finance new projects, asset rotation, in which income from completed projects is capitalised by transferring the right to levy user fees to private investors, is being explored. The TOT model eliminates the financial investor’s construction risk while offering a substantial return on investment through expected traffic growth. Because the construction risk is eliminated and the base traffic is already established, such an asset class is well adapted for infrastructure-focused private equity and sovereign wealth funds. The first round of TOT auctions finished by the Ministry of Road Transport and Highways fetched approximately $1.3 billion—1.5 times the projected value. However, the second round did not receive the intended market response because projects were not appropriately bundled. The third phase was successful based on the lessons gained from the second phase and stakeholder interactions.
The critical imperative for successful asset rotation is prioritising and phasing assets to guarantee consistent cash flows. Additionally, guaranteeing the availability of high-quality data to interested bidders is vital for effective bidding and the discovery of a fair price for the assets. To elicit interest from domestic and global investors, governments must proactively open communication channels with prospective bidders to resolve their deal-related queries. To attract various investors, the TOT model was refined to enable varying concession periods depending on project features.
The government is also introducing new models to manage the financing requirements and establish investment avenues for private investors. For example, the infrastructure investment trust strategy is being used to monetise operational assets in the power and road areas. The NHAI is also envisaging a project-based financing model to establish exceptional purpose companies that would invest in developing a specific road stretch and running it for a defined period of time to earn a return on equity and repay debt obligations.
This would allow the authority to access extra resources for highway development. Land monetisation is becoming more popular among government organisations. The Delhi Metro Rail Corporation has been engaged in the leasing of land parcels as well as the development and leasing of an IT park in Delhi. Similarly, the Airport Authority of India leases property to hotel chains, parking lots, and city-side developments. The Rail Land Development Authority is trying to commercialise surplus land owned by Indian Railways. Funds from such proceeds can be reinvested in ongoing projects to help meet financing requirements.
Authorities are also looking into methods to capitalise on increased real estate activity through the development of large urban infrastructure initiatives. For example, the stamp duty in the influence area of 500 metres along the Nagpur Metro has been raised by one percentage point. The surcharge is shared equally by Nagpur Metro Rail Corporation Limited and Nagpur Municipal Corporation. Value capture financing through a higher stamp duty or other related mechanisms needs coordinated action from all involved stakeholders, including the infrastructure development authority, state governments, and urban local bodies.
The financial models must be backed by the appropriate operating model framework, which clearly defines the duties and responsibilities of all stakeholders, including government authorities, private concessionaires, and financial institutions.
