Highways construction bucks Modi 1.0 trend; activities in the sector slow down in current financial year

Bucking the trend of a steady increase in the pace of highway construction since the Modi 1.0 government assumed office, activities in the sector seem to have slowed in the current financial year. With award of new projects being in the slow lane since FY19 (see chart), investments in this key infrastructure sector could take a further hit if efforts to encourage private investments and newer ways of resource mobilisation explored by NHAI don’t yield intended results.

Construction of highways slowed to 27 km a day during April-January in the current fiscal, from 29.7 km a day achieved in all of 2018-19. Also, awards of new projects in the first 10 months of the current year were only 35% of the targeted 10,000 km for the whole fiscal.

Against the combined target of building 11,000-km highways in the current fiscal by all agencies — NHAI, ministry of road transport and highways (MoRTH) and NHIDL — the achievement till the first week of February was 8,100 km. MoRTH has built 4,700 km of highways in the period, NHAI 3,024 km and NHIDCL, 376 km. For the current fiscal, NHAI’s target for construction was set at 4,500 km at the beginning of the year while the rest was to be done jointly by MoRTH and NHIDCL.

MoRTH largely implements projects through the engineering, procurement and construction (EPC) route where the government bears all the project costs. Most NHAI projects have till recently been built through the hybrid annuity model (HAM), which is much like an EPC model with the concessionaire having virtually no skin in the game; the equity contribution is sub-10%, one reason banks are wary of extending loans to these projects. NHAI funds 40% of the project cost in HAM upfront and remaining 60% over a period of 15 years. The traditional build-operate-transfer (BOT) has been facing a protracted period of lenders’ apathy.

Lately, HAM has also hit a roadblock with only one project having been awarded under this model till January end in the current fiscal. In FY19, the projects awarded through HAM slowed down to around 880 km of 2,222 km of projects awarded by NHAI. This is majorly due to delays in Right of Way and financial tie-ups, India-Ratings had earlier said, adding that the appetite of the private players has reduced due to a large number of HAM projects bid out in FY18-FY19.

Project awards by NHAI in the 2018-19 fiscal dropped to its lowest in four years to 2,222 km from 7,400 km in 2017-18. In each of the previous two years, NHAI had awarded around 4,300 km highway projects. In the absence of private investments, there is a big and increasing reliance on EPC projects, which in turn burdens the fisc and contributes to rising overall public debt.

In recent times, NHAI has been battling many odds — its debt is mounting, its land acquisition costs have gone up four-fold over four years. Sitting on a Rs 1.8 lakh-crore debt, as on March 2019, NHAI’s debt-servicing obligation is on the rise. In the current fiscal, it has Rs 5,573 crore debt-servicing obligation, Rs 6,600 crore in FY21 and Rs 4,700 crore in FY23. On top of that, it has to pay around Rs 15,000-crore interest annually for its outstanding debt.

At present, around 35% of NHAI’s annual expenditure goes into construction of national highways, 30% into acquisition of land, 16% in extending grant for projects under HAM, 15% in debt servicing and the remaining 4% into payment of annuity.

HAM came into being in 2015-16. Eight projects, measuring 343 km, were awarded in the first year, followed by 2,059 km in 2016-17. Project awards through HAM reached a peak in 2017-18 at 3,236 km. In 2018-19, it fell to 834 km. Under HAM, developers get 40% of the project cost upfront from the NHAI and remaining 60% over a period of 15 years.

In the Budget for 2020-21, NHAI has been given budgetary support of Rs 42,500 crore, down from Rs 36,391 crore (revised estimate) for 2019-20. It has also been given the nod to raise Rs 65,000 crore from the market, down from Rs 75,000 crore in 2019-20. Asset monetisation, which has been pegged at Rs 10,250 crore for 2020-21, is critical for NHAI to meet its construction targets.

In the Budget, NHAI was also allowed monetise to dozen highway bundles with a length of 6,000 km. Experts say such monetisation exercise, including through InvITs, securitisation of toll receipts and TOT routes, could fetch around Rs 60,000 crore by 2024-25.

In November 25, 2019, the Cabinet gave NHAI virtually an unfettered authority to make suitable changes wherever and whenever required in its asset monetisation programme through the TOT model.

Source: Financial Express