One of the world’s fastest growing countries is building new roads at a furious pace and investors, led by international blue chip funds, are piling in for a piece of the action.

Under a five-year plan unveiled in 2012, the Indian government set aside 20% of the $1 trillion in funding for its infrastructure investment plan for roads.

To meet the target to build 5,884km of new roads in five years, the National Highways Authority of India (NHAI) and the Ministry of Road Transport & Highways has been approving projects at a furious pace.

In the two years to the end of March 2015, the NHAI and the Ministry approved 5,498km of new road projects. At the same time, the government has introduced several incentives to the private sector, such as 100% tax exemptions for any consecutive 10 years during the minimum 20-year concession period, full foreign direct investment and allowing concession periods to run to up to 30 years.

As a result, the value of India’s roadways and bridge infrastructure is forecast to grow to $10 billion by 2017, at a compound annual growth rate of 17.4%, according to a KPMG report.

The leverage challenge

However, India’s private sector had gone on a borrowing binge to fund their infrastructure investments and, with the Reserve Bank of India’s decision to force banks to clean up their balance sheets, many developers will be forced to sell their assets to pay down their debt.

“The operators are heavily indebted and the lenders are getting nervous,” a New Delhi-based infrastructure banker told IJGlobal.

For example, Reliance Infrastructure which claims to be the least indebted of India’s infrastructure companies, had a total debt pile of Rs436 billion ($6.55 billion) and interest costs of Rs28.7 billion compared to revenues of Rs215 billion and a net profit of Rs6.81 billion in the year ending March 2016.

Unsurprisingly, Reliance Infrastructure is now selling assets to raise cash, including its entire 11 toll road portfolio. The company was said to be in talks in May with Brookfield Asset Management and Canada’s CPP Investment Board to sell its 1,000km of toll roads for $1.5 billion, although a recent report in local business paper LiveMint suggests Reliance Infrastructure may instead opt to list the toll roads as an infrastructure investment trust.

Either way, India’s infrastructure companies are selling and will continue to divest their toll roads, according to a recent report by India Ratings & Research, which is part of the Fitch group. “Highways as an asset class will further evolve and will set benchmarks,” the report said.

Over the past three years, around Rs400 billion, or 3,600km of roads, have been sold or are in the process of being divested.

In addition to Reliance Infrastructure, the list of sellers or potential sellers include HCC Concessions, NCC Infrastructure, Soma Enterprises and GMR Infrastructure.

Many of the buyers are large international funds, such as I Squared Capital, Brookfield Asset Management, PSP Investments and Macquarie’s India Infrastructure Fund, according to India Ratings & Research.

Institutional investors, including Indian ones such as IDFC India Infrastructure Fund, have bought all but five of the 40 toll road projects up for sale or in the pipeline to be sold.

Toll roads are attractive because once the roads are built and the risk associated with construction, including those around land acquisition, have been put behind them, they are bankable. Once in operation, India’s toll roads typically have a yield of at least 18%, the New Delhi-based infrastructure banker said.

More on the way

Investors will have plenty more investment opportunities going forward as the government pushes to clear a backlog of stalled deals.

The NHAI and the Ministry of Road Transport and Highways are looking to tender out 25,000km in the financial year ending March 2017.

In an effort to unlock delayed procurement, the Cabinet Committee on Economic Affairs approved in January the hybrid annuity model, which will see the government taking on 40% of the project financing risk.

The NHAI has already awarded 27 projects worth Rs200 billion and the first project, Welspun Enterprises’ Rs6.98 billion 8.72km Delhi-Meerut Expressway Package I, reached financial close earlier this month.

With India’s PPP law reform still in the works, many of the projects will be bid out on engineering, procurement and construction schemes, which will need to be sold to an operator upon completion, the infrastructure banker said.

“Stripping out the construction risk for operators will change the scope of the investment – investors will have a clearer view on revenue and cash flows for the 20 year concessions,” he said.