The Indian road network is expanding at a tremendous pace with record-breaking construction of 30 km of road per day. India is on course to build more national highways during the decade ending 2025 than it has cumulatively built between 1950 and 2015. This has become possible due to streamlining of financing of infrastructure in the road sector:

• The Model Concession Agreement in the road sector has standardized provisions on conditions to be met by public and private sectors, user fees and their escalation, dispute resolution, etc. providing a balanced risk-return framework.
• There is viability gap funding (VGF) for economically viable projects that do not reach the threshold of financial viability. In fact, the highest VGF among all infrastructure sectors has gone to the road sector.
• The sector has also pioneered brownfield asset monetization in India, with the first toll-operate-transfer (TOT) transaction taking place as early as 2018, which has produced handsome returns.
• The sector has pioneered InvITs, which has helped raise thousands of crores of investment. It has enabled regular income (via dividends) and long-term capital appreciation for investors.
• Several initiatives such as the adoption of the HAM model, the National Infrastructure Pipeline, National Asset Monetization Plan have also boosted investment.

The money spent on building roads has more than doubled since the financial year 2015-16. India has the highest number of PPP road projects in the developing world, at 501 (valued at $92.5 billion) in 1990-2021. However, private investment has played a limited role. Despite the fact that the total investment in the road sector has grown at a CAGR of 22% from 2014-15 to 2020-21, the share of private investment has declined from 37% in 2014-15 to only 7% in 2020-21. The limited private investment has been due to a number of impediments such as:

• Financing constraints: A big chunk of NPAs in Banks is from this sector. The share of NPAs out of total advances in the road sector increased from 1.9% in 2013 to 20.3% in 2017.
  • Although the sector is relatively stable and clean now, banks are still wary of lending to the road sector PPP projects, making it difficult for private players especially mid-sized companies with weaker balance sheets to raise finances for road projects.
• Lengthy land acquisition and clearance process: Delays in pre-construction activities (such as land acquisition, relocation of religious structures, encroachment removal, utilities shifting, and cutting of trees) have been a deterrent due to the resulting escalation in the costs.
• The stretched balance sheet of Indian developers: This is due to a number of factors, including overaggressive bidding which leads to a reduction in the rate of project completion and an increase in NPAs; and pending claims to the NHAI on breach of concession agreement resulting in companies refraining from participating in BOT projects due to potential losses. Moreover, the existing debt burden of Rs. 60,000 crores at the project level does not provide room for absorbing future risks.
• Other factors: Other factors such as poor pre-project assessment of traffic and changing macroeconomic conditions have resulted in less-than-expected returns from projects making it difficult for existing players to continue and new players to enter the sector. Private investment into building a robust infrastructure is the key to making India a $5 trillion economy by 2025. Thus, efforts are required to promote sector-specific financing platforms, deepening of the existing corporate bond market, and streamline clearance processes.