The success of the National Monetisation Pipeline (NMP) unveiled by the Centre recently hinges critically on road assets, according to analysis by CRISIL Research. According to a report by the Task Force for the National Infrastructure Pipeline (NIP), 15-17 per cent of the Rs.111 trillion investment outlay envisaged is to be met through innovative and alternative initiatives such as asset monetisation and funding through a development finance institution (DFI). NMP has two stated objectives: to recycle public capital by generating upfront fees on existing brownfield infrastructure assets and utilising the proceeds for new asset creation; and to bring in private-sector efficiencies in operation and management of these assets without the construction risk. Monetisation of road assets holds the key here, as they account for ~27 per cent of the NMP in terms of value. The government aims to generate Rs.1.6 trillion by monetising 26,700 km of four-lane-and-above national highways via the toll-operate-transfer (TOT) system and infrastructure investment trust (InvIT) routes at Rs.60 million per km. TOT mop-up – a mixed bag so far The National Highways Authority of India (NHAI) had bid out TOT bundles 1, 3 and 5 successfully, netting Rs.147 billion and giving investors a yield of ~7 per cent. Bundles 2 and 4, however, received tepid response and were cancelled. Bundles 6, 7 and 8, currently under bidding, have been kept smaller in size to attract domestic capital. NHAI is also looking to raise Rs.50 billion this year via a privately placed InvIT. CRISIL Research’s analysis of the NHAI’s asset pool of 300 national highway projects (across 25,000 km) – extracted from our proprietary database on the basis of historical toll collection and per-km toll collection – indicates that 65 per cent of the sample set analysed (in km) recorded medium-to-high toll collection growth of >15 per cent since operation. Around 31 per cent of the projects (in km) earned Rs.7 million toll revenue per km in fiscal 2020 (pre-pandemic), with >15 per cent growth in toll revenue over the history of the projects, in line with the three TOT bundles successfully monetised so far by the NHAI. In comparison, TOT bundles 2 and 4, bids for which were cancelled, exhibited average toll collection of Rs.5-7 million per km. While TOT bundle 4 posted healthy growth of >30 per cent in toll collection since the commencement of operation of its stretches (weighted average age of only 4.6 years), it was plagued by issues linked to political agitations and limited revenue growth visibility in some stretches. Another 28 per cent of projects analysed are yet to stabilise their operations, given their weighted average age of only four years. Given that toll collection and growth are contingent on a project’s stability or age since commissioning, CRISIL plotted the sample set on an S-curve, grouping projects by age. Almost half NHAI’s asset pool (in km) is less than five years old, with average toll revenue of Rs.4.6 million per km, as of fiscal 2020. As we move up the age bracket, 38 per cent of projects have six to 10 years of toll collection history and garner an average of Rs.10 million per km, while only 12 per cent are 11 years or older, with a very high average toll collection record of Rs.160 million per km, as of fiscal 2020. That said, older projects run the risk of alternative or feeder routes being constructed that could divert traffic away, as well as higher operation and maintenance costs. Successful asset monetisation can greatly ease NHAI’s burden. NHAI has greatly accelerated its pace of national highway construction, from only 2,623 km in fiscal 2017 to 4,175 km in fiscal 2021. However, more projects being executed on the engineering, procurement and construction (EPC) mode and the hybrid annuity model (HAM) has meant a greater burden on public funds, with NHAI’s balance sheet seeing its debt-to-equity ratio tripling 1.5x as of fiscal 2021. Given the ambitious targets under Bharatmala and the construction of high-value expressways, along with higher repayment of borrowings, NHAI’s fund requirements are expected to double to `10 trillion over the next five years vis-à-vis the previous five years. If these funding requirements are met, we estimate that NHAI could construct ~25,000 km of national highways over fiscals 2022-2026P, compared to 17,228 km over fiscals 2017- 2021. Thus, successful monetisation of the roads’ pipeline of Rs.1.6 trillion is critical as it could potentially meet 15 per cent of the NHAI’s fund requirements from fiscals 2022 to 2026P, compared with under 5 per cent over fiscals 2017-2021E. A number of factors will bear watching,though, including: The attractiveness of projects from the standpoint of future revenue generation potential, given the long tenure of the concession, coupled with the investor’s risk appetite 
The operational experience of players in running and maintaining highway assets 
The pace of tendering of these assets by the government at the required valuation.