Mumbai: A liquidity crunch and concerns over asset quality is expected to weigh on the second attempt by the National Highways Authority of India (NHAI) to privatize operations on toll roads.

Industry experts said response to the second round of toll-operate-transfer (TOT) auctions will be subdued compared to the robust first round. The number of bidders is expected to far fewer than the last round, and bid amounts will be a lot less enthusiastic, said the experts, requesting anonymity.

In the second round, private investors can bid for more than 586 kilometres of national highways in Rajasthan, Gujarat, West Bengal and Bihar. The base bid price has been set at ₹ 5,362 crore with the winning bidder receiving a concession period of 30 years.

When the second lot of TOT was announced in August, the deadline for submitting bids was 5 November. NHAI later extended it to 5 December. Now this week, the deadline has been pushed again to 19 December, which, industry insiders say, is due to NHAI’s struggle to attract investors.

“The initial estimated concession value (IECV, or the base price) is at the higher end when you compare to the quality of assets," a prominent infrastructure advisor told Mint. “Geographically as well, the roads are spread across the country and players aren’t very comfortable with this. I think we will see a lot less aggressive bids this time. In fact, some may even bid below the base price."

The advisor did not want to be named as he is consulting one of the bidders.

The first auction of TOT road projects in February comprised five highways in Andhra Pradesh and four in Gujarat—totalling about 700 km. Australian private equity firm Macquarie Group made the winning bid of ₹ 9,681 crore against an IECV of ₹ 6,258 crore, a resounding success not just for NHAI’s road projects but also the union government’s efforts to monetise public infrastructure and build new assets such as the Bharatmala programme. The success of the first round led the government to set a target of raising around ₹ 2 trillion through TOT in five years and copying the model to privatize state-run airports.

This time around, for NHAI, it appears the funds will be a lot harder to come by.

“The funding environment has changed since the first round of bidding for TOT happened. After the defaults by IL&FS, financing for infrastructure projects has become even more challenging, so I don’t expect developers to take an aggressive call," said Sandeep Upadhyay, managing director, Infrastructure Advisory at Centrum Capital Ltd. “On the operational front as well, there are much more challenges than in TOT 1. The stretches are fairly spread out across geographies and I believe these concerns have been already highlighted with NHAI."

The second round of TOT “has some poorly constructed roads and even though the length of the stretches are comparable (700 km vs 586km in TOT 2), the estimated toll revenue in the second lot is far lower," the investment head of a private equity firm which surveyed the second bundle of roads, said requesting anonymity. “Most importantly, some of these roads are in Bihar and West Bengal, where historically, there has been trouble with local unions because of which the cost of doing business there is much higher."

On 12 October, Mint reported that Macquarie, Atlantia and Brookfield are likely to take part in the second round, albeit with a lot less enthusiasm.

The PE investor said “the first round of TOT had recently-constructed roads with good insights on traffic data. The assets are located in AP and Gujarat, both states whose GDPs are higher than the national average and with no serious law and order trouble. The roads have higher revenue streams and are linked to major ports, which explained the high bids that the first round attracted."

The first round saw aggressive bids from Brookfield Asset Management, IRB Infrastructure, Roadis-NIIF and Macquarie.

“We know that a number of players have done their surveys and conducted their bid evaluations, but given the uncertainty surrounding the financial markets, it is difficult to predict how many of them would finally submit their bids," said Upadhyay of Centrum. “Given the overall challenges, I expect a lesser number of bids and relatively lower aggression in bids for TOT 2. This may be also one of the reason for NHAI to give some more time to potential bidders."

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