NHAI at a crossroads on debt servicing; 'concerned' PMO raises red flags

There is rising concern over debt servicing
The National Highways Authority of India (NHAI) finds itself in a spot over its deep financial stress, prompting the Prime Minister’s Office (PMO) to raise the red flag over its “unplanned and excessive expansion”. Even before the PMO’s intervention, there were signals that alerted the government to sit up and take notice.

The reluctance of lenders to fund highways built on the hybrid-annuity model (HAM), where the government itself pumps in equity to the tune of 40 per cent of the project cost, and the authority’s reliance on the EPC (engineering, procurement and construction) model for constructing roads have burdened the NHAI’s finances. EPC projects are fully funded by the exchequer. 

According to SBI Caps, the proportion of debt funding has risen sharply in the recent NHAI projects. “At the same time, toll collection has grown at a very modest pace of 6 per cent for a km (from Rs 55 lakh a km in FY13 to Rs 80 lakh in March 2019). 
Hence, revenue collection barely covers the interest servicing cost of these projects, let alone project returns. Thus, there is rising concern over debt servicing,” the report said. 

The NHAI, sources familiar with the developments said, has become excessively leveraged with its debt, which is expected to touch Rs 2.5 trillion by the end of the current financial year. While government support has marginally fallen by Rs 36,691 crore over last year, borrowings are expected to rise by about 21 per cent to Rs 72,000 crore this year. 
The NHAI’s payment outgo on account of interest is expected to be about Rs 25,000 crore annually for the next two decades or so. 

Rating agency ICRA has estimated the NHAI’s contingent liabilities at Rs 63,000 crore, but this may be a gross underestimate. Experts such as former NHAI chairman Brijeshwar Singh has said in television interviews that the actual contingent liability may be five-times more at Rs 3 trillion.

“A 20-year financial plan for the NHAI was finalised in 2013-14, which included budgetary support from the government, and borrowing and repayment of loans. It is revisited every year and is upgraded wherever needed. The borrowings of the NHAI have increased because of reduction of funds from cess collection for road construction,” former road secretary Vijay Chhibber said.

The debt pressure comes at a time when land acquisition cost has also risen. The NHAI’s expenditure on land nearly doubled to Rs 32,143 crore in 2017-18 from Rs 17,824 crore in 2016-17, according to the latest NHAI data. “The rise in land acquisition and civil construction costs, investment (EPC and HAM projects) are turning financially unviable/unsustainable, necessitating reforms,” said SBI Caps.

Though the increase in land acquisition cost is also due to more projects being taken up, there has been a rise in compensation amount for the land owners after the new Land Acquisition, Rehabilitation and Resettlement Act, 2013.

The NHAI is also likely to double its borrowings from the National Small Savings Fund (NSSF) this year and raise about Rs 40,000 crore from the NSSF in 2019-20 as part of its massive Rs 75,000-crore borrowing plan for the year. It plans to raise a similar sum in the coming years to meet the construction of national highways and expressways. The NHAI raised Rs 20,000 crore from the small savings scheme in FY19. 

Prior to that, in 2017-18, the agency raised Rs 6,657 crore by way of issue of capital gains tax exemption bonds, Rs 40,875 crore from the domestic market, the EPFO, LIC, NSSF loan and Rs 3,000 crore through issuance of masala bonds from the international markets. Its income from toll collection, revenue share and premium that companies pay instead of taking grant and interest was Rs 8,840.754 crore. 

Added to the NHAI’s burden are the annuity payments from the earlier BOT (annuity) contracts, which are paid every six months over a period of 12 to 18 years from the dates of completion of the projects. These amount to around Rs 47,946 crore till March 31, 2018.

"Until FY2014, the mode of project award was determined based on the waterfall mechanism that explored BOT (Toll) first followed by BOT (HAM) and then EPC, depending on the traffic density along the project stretch. This process slowed down the awards due to weak private sector participation," ICRA said in its report.

The report said the risk sharing was not balanced in the current BOT (Toll) model. Therefore, it is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent.

While the government and the NHAI are trying to fix the road construction model, experts believe it is the sale of road assets that requires greater attention. According to Chibber, the road monetisation drive should fetch the government at least Rs 30,000 crore every year. However, it has only been able to raise Rs 9,000 crore through the toll-operate-transfer (TOT) model,” he added.

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