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A Look At Six Financial Innovations In The Transport Sector

2017-06-01

India’s transport sector — roads, ports, railways and airports — alone requires more than half of the Rs 43-50 lakh crore needed for build-outs in the five years to 2020. The private sector will have to manage a half of this. Today the private sector has been shying away, from public-private partnerships. The government needs to facilitate financial innovation as it hastens and improves administrative processes for land acquisition, and also enhances its own accountability and sharpens focus on project execution.

The government is trying to package projects to give investors a clear view of potential cash flows. A good example is the toll-operate-toll (TOT) model, where the government plans to securitize toll income from 75 operational national highways for around Rs 40,000 crore. The money would be leveraged to construct more roads. Here’s a look at six financial innovations possible in the transport sector:

A- WAYS TO MONETISE MORE IN ROADS
1. InvIT EPC Highways: Road projects awarded under the engineering, procurement, construction (EPC) mode can be housed in an infrastructure investment trust (InvIT). The NHAI, state road development corporations and public works departments can explore setting up such InvITs. They also help developers monetize existing revenue streams and release capital to fund new roads. Malaysia, Singapore and Hong Kong have listed InvITs and real estate investment trusts, with market capitalization of $30-70 billion. CRISIL’s estimates show that Rs 20,000 crore can be unlocked through InvITs.

2. Auctioning Road Assets: The government has gained valuable experience, by conducting telecom and coal-mine auctions. So, road assets that can be tolled, and those already being tolled, can be put up for a similar auction, which would attract capital from sector-focused funds and ‘patient money’ such as pension funds and institutional investors.

3. Transferring Market Risk to Time Risk: Since 1998, Chile has successfully implemented the ‘Least Present Value of Revenue’ (LPVR) mechanism, which aids concessionaires, reduces traffic risk and assures investor participation. Contracts are awarded to bidders quoting the least present value of money realizable from future revenues. If actual revenue realization is slower, then the concession period gets extended till such time the least present value revenue bid for is achieved. Conversely, if realisations are higher, the concession period is shortened. By doing so, the market risk gets transferred to time risk.

4. Credit Guarantee: It makes sense for a government to provide credit guarantee before the commercial operation date of a project, which protects private investors from delays. It eases the pain of developers and lenders. Setting up of an independent regulator, that can help bridge the trust deficit, existing between project proponents, bidders and financiers is important.

B- WAYS TO MONETISE MORE IN RAILWAYS
5. Crank up the Non-fare Box Revenue:  In India, total revenue, languishes below 5%. Throwing open these assets for private participation will draw investors and improve the overall service delivery and customer experience.

6. Securitization of Passenger & Freight
Revenues: Currently, such receipts go into the consolidated fund. Appropriate amendment of law can enable Indian Railways to get wider participation from private investors. The overall gross traffic revenue for fiscal 2017 is pegged at around Rs 1.67 lakh crore. Securitizing a part of this can add a significant amount of headroom for aggressive capital expenditure push. But it’s important to offer new assets and products to woo private investments.

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