Rocky road for highways

The highways construction sector was one of the successes of the first term (2014-19) of the National Democratic Alliance (NDA) government. The government took on the task of reviving the sector and largely succeeded. However, that momentum is now being lost. Previously, the pace of highway construction had increased in every year of the government’s term. But the data from April to January of the ongoing financial year suggests this pace of highway building has fallen by 9 per cent in this period as compared to the previous year. While the pace, about 27 km a day, remains high, this loss of momentum suggests that the current highway building model has run into diminishing returns. This interpretation would be supported by the fact that new projects are not being awarded at the rate that they were previously. The target for new projects in the ongoing fiscal year is 10,000 km and it is likely that only a fraction of that will be awarded.

Of the various agencies entrusted with the task of building highways, the National Highways Authority of India (NHAI) has been consistently outperforming the others, and will meet its proportion of road-building target set for this financial year. That said, other issues have emerged to cloud the NHAI’s future. Much of the building is being financed by the NHAI using debt. This has led to a steady increase in its debt burden and the related interest payments. This burden, which is approaching Rs 2 trillion, is one reason why the NHAI is awarding fewer projects. Indeed, interest payments account for a significant part of the NHAI’s budgetary support. As is the case with such situations, this means that there is even more pressure on the NHAI to borrow from the market.

Naturally, as long as it is seen as a quasi-sovereign entity, it would expect to find lenders. But the fact is that appetite on behalf of both project developers and lenders for road projects has dried up. Banks and financial institutions are already struggling through a bad debt problem. And many project developers have found that the shortage of cash means that their payments from the government are constantly being delayed. Given that roads are increasingly being built either through the direct procurement route or the hybrid annuity method, in which the NHAI pays developers 40 per cent upfront and the remainder over 15 years, developers are right to be concerned about the NHAI sitting on payments. This is what threatens to reverse whatever progress has been made on the highway-building programme over the past six years. The government will have to ensure that the NHAI’s finances are sound enough for project developers to be confident once again that they will be paid on time. 

Roads can neither be built nor maintained on the cheap. The landmark achievement of the first NDA government, under Atal Bihari Vajpayee, was the rural roads scheme, which built half a million kilometres. But many of these roads are now in poor condition, as two-thirds of them are past the period when the original contractor must repair them, and Union budgetary support for their repair has declined since 2015. While this is an issue for states and local bodies to resolve, it is clear that the Union government must take responsibility, since local governments are usually short of funds. A direct transfer from the Union government to local bodies is one option. 


Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel