Indian roads investment platform, Vertis Infrastructure Trust is open to working with local developers to ensure an asset acquisition pipeline, a senior official told Infralogic.

Vertis, which manages an INR 260bn (USD 2.9bn) portfolio entirely comprised of operating highway concessions, may need to explore joint ventures with builders, Executive Director and Joint CEO Gaurav Chandna (pictured below) said.

“We can potentially do that only if there is a stable and visible recurring pipeline of projects,” he said.

Vertis is backed by KKR and Ontario Teachers’  Pension Plan.

The problem facing investors in Indian roads is the limited number of toll road projects awarded for development in the last few years by the National Highways Authority of India (NHAI), and consequently the lack of a pipeline of assets that they can buy from local builders.

Investors were already in discussions with developers in 2024 following the NHAI’s plan last January to start tendering BOT projects of more than 5,000km, worth more than USD 25bn.

While the central roads agency published tenders for contracts totalling about USD 3.6bn by the following month, it has awarded only two BOT projects of about USD 500m each since then, one to G R Infraprojects, and the other to DRA Infracon.

Construction risk

The scant awarding activity is an indication of the challenges facing the NHAI. These include securing right of way (ROW) and completing pre-development work prior to awarding contracts.

Addressing these is key because asset managers in India’s roads sector build their entire investment philosophies on eliminating construction-related risks.

“If at all we get into this, it’ll be on a very selective basis, and probably in projects which are largely brownfield so that ROW challenges and delays during construction are significantly lower compared to greenfield stretches,” said Chandna.

“We would also need to assess whether our returns would be commensurate with the incremental risk we may take, because so far the market has not been deep enough for us to be able to make those assessments,” he added.

Contractual changes

Developers too are waiting to see the amendments to the model concession agreement for BOT contracts, executives at three road building companies told Infralogic.

They expect that the NHAI will be able to start awarding contracts once a decision is taken to notify the amendments.

While an inter-ministerial committee has already approved some of the amendments proposed by the NHAI, industry body National Highway Builders Federation has suggested further tweaks, Infralogic reported on 14 October.

Developers are also concerned about the government’s intent to cap the amounts that can be sought via arbitration to INR 100m (USD 1.1m), disputes resolution lawyer Abhisaar Bairagi said, as any claims by developers more than this amount would have to be litigated in the courts.

While Bairagi – a partner with Khaitan & Co – said she is unaware of the guidelines being adopted yet in roads contracts, this can potentially dampen enthusiasm for projects, she said.

“Since most infrastructure projects tend to have significant claims and counter claims, a limit of INR 100m is very miniscule, especially for the size of the BOT projects being contemplated,” Bairagi said.

“Developers usually prefer arbitration as the process is speedier while in the case of courts, the realisation of your claims can take far, far longer,” she added.

Alternate pipeline

While the NHAI prepares to start calling for bids for new development, investors are looking to the authority’s toll, operate, transfer (TOT) auctions for operational highway concessions as another avenue to grow their portfolios.

While there aren’t any large-sized bundles that are coming up for auction – similar to the package of nine highways – that Macquarie won in 2018 with a USD 1.5bn proposal, Vertis is content to bid for the smaller bundles on offer.

Most auctions are likely to be for projects in a range either between INR 10bn-INR 20bn or INR 30bn-INR 40bn, as per a list that the NHAI has published.

While there isn’t clarity on the schedule for even these auctions – with just one contract handed out this year, and another waiting a formal award – there aren’t too many options for investors to acquire toll assets.

“We expect the NHAI to award more than two or three contracts in a year, which put together, can be a sizeable amount,” said Chandna, adding that the pipeline available with the NHAI today does not comprise of too many large projects.

“Hopefully, the greenfield projects that are currently being built or have just been completed, such as the Delhi-Mumbai expressway, will come up for auction in the near to medium term,” he said.

Aggression okay

While some of the 17 TOT auctions have been fiercely contested, others have drawn bids in a wide range, with the gap between the highest and second-highest proposals in an October auction being INR 22.7bn.

Mumbai-based IRB Infrastructure Developers won that contract with a bid of INR 92.7bn, ahead of second placed Adani Group, which proposed INR 70bn. PNC Infratech had offered INR 54bn.

In some cases, the NHAI has annulled auctions, deeming all proposals to be below its expectations.

Chandna does not see the wide range as a problem for the NHAI.

“In the TOT model, the deliverables by the concessionaire are relatively limited compared to greenfield projects because the bidder is fulfilling all financial obligations upfront by paying the concession fee at the time of the contract being awarded,” he said.

“What remains after that is taking care of debt, as well as maintenance, with maintenance taking precedence over debt servicing,” he said.

“Usually, operations and maintenance (O&M) costs are 12%-15% of the toll revenue, so it is fair to say that at all points in time, O&M will be taken care of regardless of whether the bid has been an outlier or not.”

For lenders, the worry is whether they will get paid in case a contract is terminated before its scheduled expiry. This is also taken care of since payments to lenders in such situations are linked to the bid value and not to the reserve price.

“For toll projects, the bid value lies in the eye of the beholder and if someone has a more optimistic view on the traffic potential of an asset, it is always possible there could be a significant delta between two bidders,” said Chandna.