PSP to Jointly Invest $2B in India's Toll Roads?

Tanya Thomas of DealStreetAsia reports, NIIF, Roadis to jointly invest $2b in road projects in India:

Infrastructure investment company Roadis and the National Investment and Infrastructure Fund (NIIF) have announced the creation of a platform that will invest in road projects in India.

The platform will invest up to $2 billion of equity to target toll-operate-transfer models, acquisition of existing road concessions and investment opportunities in the road sector with the aim of creating a large roads platform in the country, the companies said in a press release.

With 710 km of highways under ownership and management, Roadis is a wholly owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), one of Canada’s largest pension funds. NIIF is a fund manager that invests in infrastructure and related sectors in India, anchored by the government of India.

In 2018, the central government introduced the toll-operate-transfer model for national highways as part of its efforts to monetise public infrastructure and build new assets under programmes such as Bharatmala. The first round of TOT auctions was hugely successful, where the winning bidder Macquarie bid ₹9,681 crore against the NHAI’s expectation of₹6,258 crore for 700km of national highways. However, the second round of auctions, for 586km of highways, had to be cancelled after the highest bid was 14% below the NHAI’s expectation of ₹5,362 crore.

Roadis-NIIF had bid jointly in the first round of auctions.

José Antonio Labarra, CEO, Roadis, said, “This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India. NIIF is a partner that perfectly fits our profile given its commitment to infrastructure investment and the robust governance standards it follows”.

Sujoy Bose, MD & CEO, NIIF, said, “The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities. The road network is a key enabler for the Indian economy to grow and sustain its position as the fastest growing major economy in the world, and this provides significant upside potential for investments, while creating value for users.”

Bloomberg Quint also reports, NIIF, Roadis Partner To Invest Up To $2 Billion In Highway Projects:

The National Investment and Infrastructure Fund of India, and European highway concession manager Roadis announced the creation of a platform that will invest up to $2 billion in highways projects in India.

With 710 km of highways under ownership and management, Roadis is the largest European highway concession manager in India and is a wholly-owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), one of Canada's largest pension funds.

NIIF is a fund that invests in infrastructure and related sectors in the country.

"The platform will invest up to $2 billion of equity to target Toll Operate Transfer models, acquisitions of existing road concessions and investment opportunities in the road sector with the aim of creating a large roads platform in the country," the entities said in a statement.

This jointly-held platform will benefit from the expertise and value creation capabilities of both the entities, the statement said, adding that with strong investment and operational expertise, the platform intends to operate the roads portfolio with the highest global standards, while creating maximum value for the shareholders.

Jose Antonio Labarra, chief executive officer at Roadis said, “This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India. NIIF is a partner that perfectly fits our profile given its commitment to infrastructure investment and the robust governance standards it follows.”

“The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities. The road network is a key enabler for the Indian economy to grow and sustain its position as the fastest growing major economy in the world, and this provides significant upside potential for investments,” Sujoy Bose, managing director & CEO at NIIF said.

And Ranjani Raghavan of VCCircle reports, NIIF and PSP-owned ROADIS float $2 bn road investment platform:

Infrastructure investment firm ROADIS and the Indian government-anchored National Investment and Infrastructure Fund (NIIF) have set up a $2 billion platform to invest in road projects in India.

ROADIS is a wholly-owned subsidiary of the Public Sector Pension Investment Board (PSP Investments), a Canadian pension fund.

The platform will invest equity in toll-operate-transfer (TOT) models, acquisitions of existing road concessions and other investment opportunities in the road sector, as per a statement.

“This agreement, which aligns with our growth strategy, strengthens our long-term commitment to India,” said José Antonio Labarra, chief executive officer of ROADIS, which has about 710-km of highways under ownership and management.

In an interview with VCCircle last December, PSP Investments’ global head of private investments Guthrie J Stewart said that it was focusing on scaling up its investments in Indian infrastructure, especially in transport.

ROADIS and NIIF had last year jointly bid for toll-based highways in the first such auction in India where the government decided to monetise operational roads.

Eventually, the National Highways Authority of India (NHAI) sold nine toll-based highways under the TOT model to Australia's Macquarie Group for Rs 9,681 crore (around $1.5 billion).

“The Indian road sector has attracted significant global capital over the last two decades and will continue to offer large investment opportunities,” said Sujoy Bose, managing director and chief executive officer of NIIF.

A recent VCCircle analysis of the sector showed that while the government’s budgetary support and investment ballooned more than four times -- from just short of Rs 33,000 crore in 2014-15 to more than Rs 1.3 lakh crore during the last financial year -- private investment did not maintain that pace.

Private investment in the highways sector went up more than 54% from 2014-15 to 2015-16, but slid sharply in the following two years to around Rs 16,500 crore, before perking up to Rs. 25,000 crore during the last financial year.

Several marquee private equity investors including Macquarie, Brookfield, I Squared Capital, International Finance Corporation-backed Cube Highways and the Kuwait Investment Authority have pumped money into the sector in recent years.

Cube Highways has been particularly consistent in placing bets on the Indian highways sector over the last 4-5 years. Not only was it among the top private equity investors over the past three years, it reportedly also emerged as the highest bidder for this year’s NHAI auctions under the TOT model. However, the government agency canceled the bids since they were far below its expectations.

In 2017, 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.

You'll recall last month, I discussed why CPPIB and OTPP are eyeing big Indian projects and stated CPPIB was in advanced talks to acquire 12 operating road assets of Sadbhav Infrastructure Project Ltd (SIPL), in a deal worth $400-500 million (Rs 3,000 crore).

You can read more about ROADIS here. I note the following:

ROADIS is a company with proven international experience in highway concessions. It is owned by one of the largest Canadian pension fund managers, PSP Investment (Public Sector Pension Investment Board), and it manages its assets through the promotion and finance of the projects, until their execution, construction and operation.

It currently develops and operates a significant portfolio of assets and projects, with an investment which amounts to over  3,408 M €. Specifically, it has 1,882 km of highway under concession.

Its experience and position in these sectors have allowed it to reach investment agreements with diverse international partners.

ROADIS is a global company with a solid position in the countries where it operates. Its geographic presence has a high strategic value, given that it is present both in countries with consolidated economies (USA, Portugal and Spain), and in key markets of the new world economy (India, Brazil, Mexico).

ROADIS has a strategy of international expansion and continuous growth which is translated into a quest for investments for new assets.

Basically, ROADIS is one of the platforms PSP"s Infrastructure team relies on to invest and manage its toll road projects in India and elsewhere. It's a subsidiary of PSP but operates independently on PSP's behalf and is staffed by highly trained professionals. You can read more on ROADIS's executive committee here.

Its CEO, Jose A. Labarra, came from Grupo Isolux, in which, as General Director of Motorway Concessions, he led the achievement of the portfolio of projects that constitutes the starting point for ROADIS today. 

The members of ROADIS's board of directors are:

• Patrick Samson. Chairman (Managing Director, Head of Infrastructure at PSP)
• José A. Labarra Blanco. CEO and Vice Chairman
• Janis Carol Kong. Non-Executive Director
• Gabriel Damiani. Director
• Patrick Charbonneau. Director (Managing Director, Infrastructure at PSP)
• Ignacio Moreno. Non-Executive Director

So, even though ROADIS operates independently on PSP's behalf, two of its board members are the two most senior infrastructure investment officers at PSP.

[Note: PSP has other platforms that manage other assets like airtports. Along with Ferrovial, it was seeking to acquire a majority stake in India’s GVK Airport Holdings].

And as stated in the article above, India is where the capital is going and there's a lot of competition from the likes of Cube Highways and large Canadian asset managers like Brookfield, one the best infrastructure investors in the world.

In fact, in February, Rajat Arora of India's Economic Times reported, 4 companies put in bids for 9 operational national highways under ‘toll-operate-transfer’ model:

The government’s ambitious plan to monetise publicly funded, commercially operational national highway projects has got a big boost.

Four companies — Brookfield Asset Management, Macquarie, IRB Infrastructure and Roadis-NIIF — have put in bids for nine national highways on offer in the first round. The National Highways Authority of India (NHAI), which invited bids for these highways, hopes to generate more than Rs 6,000 crore by leasing out the roads under the ‘toll-operate-transfer’ (TOT) model.

The auction will involve five highways running across Andhra Pradesh and four in Gujarat. The total length of these highways is just under 700 km.

The Cabinet Committee on Economic Affairs in 2016 had authorised NHAI to monetise 75 publicly funded national highways that are operational and have been generating toll revenues for at least two years.

The government expects the TOT deals to bring in at least Rs 60,000 crore. This will provide NHAI funds to build more highways, filling in for the private sector that is reluctant to invest in new highways. A second batch of around five national highways with a total length of 500 km would be put out for bidding in March.

Under the TOT model, pension funds and PE firms are allowed to lease government-owned national highways for 30 years by making an upfront payment. The lessee, in turn, gets the right to collect the toll, operate, manage and maintain the highway stretch. The government can also increase the concession period in later stages, if the concessionaire wants it.

"Asset recycling of public funded infrastructure in India has achieved its first milestone. Three international investors and one domestic company have come forward to bid for national highways,” NHAI member-finance Rohit Kumar Singh told ET.

“Once it is successful in the highways sector, other sectors such as power transmission, oil and natural gas could replicate the same model, thereby unlocking the huge off-budget funding," he added. The government will line up more such projects for bidding early next year.

Technical bids for the national highways on offer in the first round will be opened on Friday. After technical qualification assessment, financial bids will be opened next week. “Only then we'll be able to make the quotes pubic," Singh said. NHAI will provide a risk cover to the lessee against circumstances such as a rapid fall in toll collection and structural or engineering fault on the highways.

The interesting thing to note from this article is if these public-private toll road projects in India go well, it will open the door to using the same model in other sectors such as power transmission, oil & gas, and renewable energy.

The key thing is investors aren't willing to take greenfield risk, the Indian government has to take construction risk, and investors can then invest alongside it and manage these assets properly.

Now, why are Canada's large pension funds investing in toll roads in India? The short answer is that's where growth will be over the next decades.

A friend of mine, an expert on toll roads, shared this with me:

"In developed countries, most families already have one or two cars. Your toll roads and other infrastructure projects typically grow with GDP, so your gross return will be GDP growth + CPI inflation. In developing countries like India where demographics are favorable, industrialization is taking place and lots of people still don't own cars, you can still collect very nice returns on toll roads. You will get GDP growth + CPI inflation + increases from tolls + as more people begin buying one or two cars, it will generate more traffic on these highways and profits will increase commensurately. It's a long-term project in a growing economy with great demographics."

But my friend also stated this: "However, sponsors tend to be too optimistic in their financial models and raise tolls too quickly (i.e charging more than the economy can bear). This usually has a negative impact on demand."

He also cynically added: "Or you do what Greece did - overtax gas and everyone stays home because it's too expensive to commute to work. Kills the economy and tolls roads all at once."

My friend is right, in Greece, they built this beautiful highway going from Athens to Patras, Olympia Odos, and when it finally opened, Greeks kept using the old highway to avoid paying tolls on the new one. It has since become more popular and more affordable as the economy has picked up somewhat in recent years.

Now, India isn't Greece, it's booming, has a very young population, with more than 50% of its population below the age of 25 and more than 65% below the age of 35.

Try finding favorable demographics like that in the developed world where there has been a 'remarkable decline in the fertility rates.

Even China isn't doing well when it comes to demographics. In fact, a recent Bloomberg article states that America's big advantage over Russia and China is demographics:

Countries with unhealthy demographic profiles will find it harder to remain economically competitive as their populations shrink and a smaller number of workers support a larger number of retirees. They will face agonizing guns-versus-butter tradeoffs that make it harder to undertake bold geopolitical ventures. When demographic problems become severe, they can exacerbate social and political strains, leading to crippling instability. And as it happens, America’s competitors are likely to face sharp demographic pressures in the coming decades.

The legacy of China’s one-child policy will be a steadily shrinking population for generations, as the number of Chinese falls from 1.41 billion in 2017 to 1.36 billion in 2050 (according to figures provided by the United Nations), and then falls faster still to perhaps 1 billion by 2100. Meanwhile, China’s retirement-age population will jump starkly, according to statistics compiled by Nicholas Eberstadt of the American Enterprise Institute, from 135 million in 2015 to almost 340 million by 2040, as its working-age population falls by roughly 100 million.

This demographic contraction will place tremendous stress on China’s economy, as old-age costs skyrocket and the number of productive workers shrinks. The slowing of Chinese growth that is already underway will become far more pronounced; Beijing’s debt problem will become worse as social expenditures rise and austerity becomes more politically difficult to pursue. The Chinese government will have fewer resources with which to continue its military buildup and implement major geo-economic projects like the Belt and Road Initiative. Not least, demographic trouble may well foster domestic upheaval, as the shortage of marriage-age females, challenges in providing for the wellbeing of retirees, and tapering off of economic growth test China’s social compact. We are accustomed to thinking of China as a rising power. Yet demographic decline is setting in, with potentially profound consequences.

Russia faces its own problems. Its population is around 144 million today. But due to numerous factors — the lingering demographic damage caused by World War II, low birth rates and levels of immigration, and a relatively short life expectancy — the population may be as small as 119 million by 2050. The working-age population will decline from 60 percent to less than 50 percent of the overall population during this same period, compounding Russia’s long-term economic decline. The implications are already becoming clear: Russia will face Hobson’s a choice between pouring scarce resources into old-age pensions and inviting the political tumults that austerity could easily bring. Nuclear weapons and the capacity to create mischief through information warfare will keep Moscow in the game, but Russia’s underlying geopolitical potential will continue bleeding away.

The U.S. looks pretty good in comparison. Thanks to a relatively healthy birth rate and high levels of immigration, the U.S. population is slated to increase from 324 million in 2017 to 390 million in 2050. The retirement of the baby boomers will make America a significantly older society, as the proportion of retirees to working age individuals nearly doubles by 2060. But the overall growth of the population will cushion the effects of this shift, and the stresses America faces should not be nearly as severe as those its rivals confront. As a study by the RAND Corporation concludes, “Barring catastrophe, the United States appears likely to have the demographic and economic resources to remain the world’s indispensable nation through at least 2050.”

While the US will likely be the 'world's indispensable nation' for decades to come, the article also warns:

[...] if America is likely to be in relatively good shape demographically three decades from now, many of its traditional allies will not be. Important partners such as Japan, Germany and many Western European countries will have shrinking, aging populations. Japan in particular: Its population is projected to decline from 127 million in 2017 to 109 million in 2050 and keep falling thereafter. As a result, America’s core alliances will be less of a force-multiplier in the future than they are today. This will place an ever-higher premium on deepening ties with countries such as India, whose population is set to grow from 1.3 billion in 2017 to 1.7 billion by 2050.

Got that? India is the place you want to be over the next three decades which is why PSP, CPPIB, OTPP, the Caisse, OMERS and other large Canadian pensions and global asset managers are focusing their attention there.

Just keep this in mind, infrastructure is a long-term asset class, even more so than real estate, with a duration that closest matches the long-duration liabilities of pensions, making it very attractive from an asset-liability standpoint. Typically, infrastructure assets offer a return in between stocks and bonds with a much lower volatility than stocks (similar to real estate).

But infrastructure assets are pricey in the developed world as capital chases fewer deals, which is another reason why these large pensions and asset managers are turning their attention to emerging markets where they can still find attractive deals, for now.

Are there risks? Yes, infrastructure carries illiquidity risk, currency risk but the biggest risk of all, especially in countries like India and China, is political and regulatory risk. All it takes is one bad government to come in, change tolls for political reasons, materially impacting the yield on these infrastructure assets (of course, that will kill private sector investment in India which is why it's not a wise decision).

Below, India's $90 billion Delhi-Mumbai industrial corridor is one of the most ambitious, expensive endeavors in human history. But the project that will change the lives of the most people is the construction of hundreds of thousands of kilometers of paved roads.

Also, Bharatmala is the name given to a centrally-sponsored and funded road and highways project of the Government of India. The total investment for this plan is estimated at ₹5.35 trillion (US$83 billion), making it the single largest outlay for a government road construction scheme.

Watch these clips, they are fascinating and explain why super highways will transform India.