Actis JV with Tata targets up to $2b

The JV, called TRIL Roads, is hoping to capitalize on the Indian government’s push for new highway construction.

The Indian central government is looking to increase its highways program under the National Highway Authority of India (NHAI), including some so-called mega-projects on a new scale in Indian road building. “There was about 3500 km bid out last year. The government wants to bid out 12,000km this year,” Michael Till, Partner and co-head of the infrastructure practice at Actis, told AVCJ. “Some of the mega-projects get up to 400-500km.”

Benchmarking the overall building target against the current size of projects like the 110 km Pune-Solapur Expressway, Till sees a very sizeable sheaf of opportunities at national level, as well as state-level road projects. The TRIL/Atlantia JV plans at least five road projects of 500km+ length.

“If it is implemented, it will be probably be the biggest PPP program in the world over the next five years,” Till concluded.

The partnership

Actis and Tata will invest $200 million, with Actis taking 35% of the JV, although it will be established initially as a 100% Tata subsidiary. Actis will contribute $77.5 million for the 35% stake, while the Tata Realty & Infrastructure division will take 65% for $122.5 million. Partnering with leading European toll roads operator Atlantia, the JV will then launch a $400 million investment platform, aiming to attract a further $300 million+ in government support. The JV’s capital will be levered up to allow investments aggregating up to $2 billion.

“When we bid for new concessions, we will bid in consortia with Atlantia,” said Till. “Atlantia will match the $200 million of TRIL Roads.”

Atlantia is a $13.1 billion Rome-headquartered transport and communications holding company that owns 100% of Autostrade per l’Italia, Italy’s largest toll motorway builder and operator. And though he noted that Atlantia is just entering the Indian market, he emphasized “it’s a very strong consortium in terms of its bidding qualifications.”

The TRIL/Atlantia partnership will bid for concessions to upgrade, operate and receive tolls for existing Indian roads and highways. Tata and Atlantia are bringing a first asset to the JV after winning the concession for the 110 km Pune-Solapur Expressway, a build/operate/transfer (BOT) project, from NHAI.

Till told AVCJ that the government support component of the JV funding will come in at the individual project level. Government grants usually provide the gap funding between what the private sector is prepared to put into that project, and what is needed for that project to be viable at the tariff that the government sets.” Tariffs, he pointed out, are dictated by government policy, but the state is ready to cover the difference between its socially-determined target tariffs and a viable return for private-sector investors.

This is an important component of deal terms, as India’s tolls are notoriously low, around 1/4 to 1/3 of the norm of US 6 cents per kilometer suggested by the International Finance Corporation.

“You have to balance the need to attract private-sector capital, which is absolutely crucial for these road projects in India, with a viable and acceptable tariff price on the roads in India,” he told AVCJ. “The regulatory environment in India is robust enough that you can depend on that grant.”

As for the reliability of the bank leverage needed to bring the JV up to its target $2 billion capacity, Till said, “At the moment, there seems to be plenty of availability of local bank funding for robust projects with strong developers. Having said that, there were only two projects that closed last year; the banks take their own view on viability.”

Bidding process and feasibility

Indian banks, Till emphasized, will judge loan prospects by the credentials of the would-be project investors, and in this area, he feels the JV will have an advantage. He also pointed out the importance of working with a partner like Tata, both for credibility with the leverage providers, and in broader execution terms.

“The Tata Group is one of the premier corporate houses in India,” he told AVCJ. “They have a reputation and a history of building businesses. They have developed projects in other areas: they have a power and a real estate business.”

Potential leverage providers will partly be judging projects on the basis of the proposed financing structure, particularly the feasibility of the bidder’s calculations.

“When you bid on a new concession, the competitive element comes in when bidders say: this is the level of government grant that we require,” Till said. “The main deciding factor on the final bid is the bidder that requires the lowest government grant.” The JV’s inputs, he explained, will be construction costs, funding structure, and cost of debt, as well as predictions of traffic volume and likely returns over the length of the concession. “You plug that into the concession model,” he told AVCJ.

Despite these caveats, Till maintained that the opportunity, and the strengths of the JV platform are considerable. “The opportunity is huge,” he told AVCJ. “It’s a very ambitious program … it clearly requires private sector capital. The government realizes that.” 

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• Actis Capital