Scepticism is high in road building industry after the PMO said NHAI is stuck with unplanned and excessive expansion of roads declared as national highways
To reduce financial stress, PMO has suggested a return to traditional build-operate-transfer projects but this may find few takers
About a fortnight ago, the Prime Minister’s Office (PMO) ticked off the National Highways Authority of India (NHAI) for reckless speeding. In a letter, the PMO outlined suggestions for NHAI under three broad heads: reorganize portfolio, check commercial viability of projects and monetize assets.
The moot question is whether implementing the suggestions will stall the road development plans of the Narendra Modi government.
Already, after a robust FY19—the year preceding general elections—the pace of activity has slowed down. Year till date in FY20, a mere 500km of road projects have been awarded, raising doubts about NHAI’s ability to fulfil the targeted 7,000-8,000km for the year.
Scepticism is high in the road building industry after the PMO said NHAI is stuck with unplanned and excessive expansion of roads declared as national highways (NH) or “NH in principle". More alarming is the suggested shift away from the hybrid annuity model (HAM) and engineering, procurement, construction (EPC) formats, “with all investment made by the government, which is unsustainable".
To reduce financial stress, the PMO has suggested a return to traditional build-operate-transfer (BOT) projects. But this may find few takers. In BOT projects, the entire equity is borne by the road developers, said Binod Modi, analyst at Reliance Securities Ltd. These projects, he said, had dragged companies into a quagmire of debt and losses, worsened by litigation over approvals and overestimation of traffic.
BOT lending is on the negative list of public sector banks in its current form. In a BOT project, the developer builds, operates and then transfers it to the government, which in turn pays the developer once tolling begins. However, HAM entails a 40% upfront payment by the government, while the balance project cost has to be raised by the developer.
On top of it, a Nomura report says the PMO’s suggestion to reassess the financial viability of projects to be awarded, in the light of rising land acquisition and construction costs, may delay ordering. “An attempt to restart BOT (toll) in a big way will only result in a slowdown of ordering, potentially leading to ₹100 trillion of infra capex target for the next five years being missed by the central government," it adds.
Note that 90-92% of the awards at present are on the HAM and EPC models, in which most of the financial burden is on NHAI.
Ironically, the letter from the PMO comes a few weeks after Union roads minister Nitin Gadkari said ₹15 trillion would be spent on highways. Although the minister has brushed aside concerns stemming from the PMO letter, stating that they are only “suggestions", there is more to it than meets the eye.
NHAI’s debt has risen 2.4 times from FY17 to ₹1.8 trillion in FY19, primarily because of spiralling costs of land acquisition in the roads sector. Land costs make up 30-35% of the total spends and have nearly doubled to ₹3 crore per hectare in the last three years.
This also underscores weak coordination in policymaking between the various arms of the government. For instance, compliance with the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 increased compensation by four times the market value in rural areas and twice the market value in urban areas. Around the same time, NHAI assumed responsibility for garnering 80% of the land before awarding projects, thereby fuelling costs.
Highlighting the funding conundrum, a report from Kotak Institutional Securities Ltd says that compensation from cess funds has been lower than land acquisition costs since FY14. Then, there are contingent liabilities on account of arbitration disputes with the developer.
However, among the PMO’s suggestions is the urgent need for NHAI to monetize its existing completed or ongoing assets through toll-operate-transfer (TOT) and approval for Infrastructure Investment Trusts (InvITs).
This is an uphill task. Rajeshwar Burla, vice president and associate (corporate ratings) at Icra Ltd, said: “NHAI has identified 75 national highway stretches of about 4,400km for potential monetization. But the success of TOT is about getting the mix of projects and the valuation right."
While the first bundle of TOT projects got a stellar response, an overambitious base price for the second bundle failed to garner a favourable response.
Even so, most of the funds raised by NHAI in FY19 from monetizing existing highways through TOT projects and from toll collections have also been ploughed back. “Such toll collections, adjusted for loss of toll revenues from the sale of TOT projects, appear to have declined on a year-on-year basis in FY19," says the Kotak report.
As for the other suggestion of hiving off road assets into InvITs, one wonders if Indian markets are mature enough to absorb such instruments. Besides, the existing assets that were awarded barely two-three years ago are not operational and returns may not lure InvIT investors. Further, the government is yet to get approval for InvITs from the Securities and Exchanges Board of India. Hence, it is unlikely in FY20.
That said, the need for funds is urgent. “Land acquisition is critical for road development. Any slowdown in land acquisition due to funding challenges would derail the overall pace of road development," added Burla.