Cash crunch, surging costs may derail road construction plans2 min read . Updated: 03 Sep 2019, 02:00 PM IST
- The PMO has recently told the NHAI that the government is not keen to sustain its large investments in building highways
- The private sector is also not keen to do so, according to industry analysts and highway developers
Mumbai: A funding squeeze and rising construction costs are threatening to derail India’s ambitious highway plans as state-run road developer, the National Highways Authority of India (NHAI), and the private sector rethink their strategies.
The Prime Minister’s Office (PMO) has recently told NHAI that the government is not keen to sustain its large investments in building highways. The private sector is also not keen to do so, according to industry analysts and highway developers.
Nitin Gadkari, Union minister for road transport and highways, added to the quandary on Tuesday by saying that NHAI will continue to raise debt to fund the expansion of road infrastructure. NHAI’s construction cost has surged, led by a 30% annualised growth in average land acquisition cost from 6.8 million/hectare in FY13 to 34 million/hectare now, SBICap Securities said in a 23 August report.
Land purchase costs increased as the company had to comply with the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
The government had said during the presentation of the budget proposals that it would invest Rs100 trillion in the infrastructure sector over the next five years. However, the PMO doesn’t seem keen to risk public capital in the roads sector.
Last week, Mint reported that Nripendra Misra, principal secretary to Prime Minister Narendra Modi, wrote to Sanjeev Ranjan, secretary, ministry of road transport and highways, suggesting that NHAI consider becoming a road asset management company without actually holding road assets or building any more of its own. Mint also reported last week that Misra resigned, but Modi requested him to continue for two more weeks.
NHAI is in talks with State Bank of India and Life Insurance Corp. of India to raise Rs75,000 crore this year, Gadkari said in an interview.
“The NHAI is a AAA rated organisation and we can raise enough debt to keep building roads. What the PMO has said in its note are only suggestions. The NHAI has always been able to meet its fund-raising targets," he said.
The private sector is becoming more risk-averse in the highways sector. The need for the private road construction industry now is access to capital, said Jayant Mhaiskar, chairman and managing director, MEP Infrastructure Developers. “Our ability to achieve financial closure is key, whether in engineering, procuring, construction, hybrid annuity model, or as BOT toll projects. This is just nomenclature. The HAM and BOT models have prevailed for a few years and these can be explored further. However, lenders should finance the private sector effectively and do disbursements on time for us to complete these projects within the stipulated time frame, otherwise there is a cascading effect on the lifecycle of the project, which is detrimental to the sector," he said.
Awards of national highways plunged to a five-year low of 5,493km in FY19, a 68% decline from the 17,055km awarded in FY18. This was largely because of challenges concerning land acquisition and the Lok Sabha elections. However, execution was healthy at 10,855km in FY19, about 10% more than FY18. The execution target for FY20 has been set at 11,000km.
The “order book-to-revenue ratio of road project developers, after peaking in Q1FY19, has been declining every quarter because of dismal project awards over the last 17 months, said Vishal Kotecha, associate director, India Ratings.
Project awards are expected over the next two-to-three months, but any significant deferment in NHAI’s plans to awards project on account of the recent PMO letter could pose revenue visibility risk for road developers.