India’s first big-ticket TOT auction shows PE investors’ appetite for roads

The National Highways Authority of India's toll-operate-transfer (TOT) auction that concluded last week showed that investor appetite for the country's highways sector is high and that well-performing operating assets can fetch a premium.

In a first such auction in India, where the government decided to monetise operational roads, NHAI sold nine toll-based highways under the TOT model to Australia's Macquarie Group for Rs 9,681 crore (around $1.5 billion), which is 54% higher than what NHAI had anticipated.

The success of the first such auction by the Indian government creates an established framework for the future of such bids in the roads sector. NHAI plans to launch the second auction where it would put up about 1,700 km of completed projects under the TOT model.

Monetisation of the first 75 operational highways under the TOT model may fetch the Indian government about Rs 40,000 crore (around $6 billion), ratings firm CRISIL had said in a report last year. This estimate assumes an annual toll revenue growth of 7-8% for the project and a return on equity of 14-16% for the investors.

The highways authority plans to use the proceeds from the monetisation to invest in developing more highways.

"Success of the first round of bidding under this model has proved that there is a good private finance appetite for operational infrastructure projects. This paves the way for financing of such projects by the government through use of public finance during the construction phase when the risk is significantly higher, and thereafter, monetising the constructed assets for an upfront premium during the operational phase," said Anjan Dasgupta, senior partner and head of finance and projects practice at HSA Advocates.

HSA Advocates was the legal adviser to NHAI for the first TOT sale while KPMG was the financial adviser.

Besides Macquarie, other financial and strategic bidders included Canada's Brookfield Asset Management at Rs 7,511 crore, IRB Infrastructure Developers Ltd along with Italy's Autostrade at Rs 6,930 crore, and Canadian pension fund PSP Investments' platform ROADIS along with the National Investment and Infrastructure Fund (NIIF) at Rs 6,611 crore.

Under the deal, the nine highway projects will be handed over to Macquarie for toll collection, operation and maintenance for 30 years. The nine projects totalling about 680 km are in Andhra Pradesh and Gujarat.

In September last year, Brookfield Asset Management acquired two assets worth Rs 1,900 crore (close to $300 million) in the largest private equity buyout deal in the roads sector.

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