The pandemic-led lockdown has deepened the potholes on the road ahead for the National Highways Authority of India (NHAI). The steep drop in toll collections and a slowdown in the pace of asset monetisation, which add to tight liquidity conditions, point to funding challenges for the NHAI. This could put the government body’s road works at risk, at least in the near term.
After all, these challenges come in the backdrop of a grim fiscal 2020 when toll revenue growth was negligible. The economic slowdown, revised axle-load norms and finally, the lockdown in the last week of March hit traffic movement. Even after lockdown restrictions have been eased, initial indicators show a sharp rebound in toll collections is unlikely.
Rating agency ICRA Ltd estimates a 10-13 percent decline in toll collections across projects in fiscal year 2021.
On top of this, the NHAI’s efforts to raise funds through the toll-operate-transfer (TOT) model have also slipped into the slow lane. Of the four bundles to be awarded, only the first was a resounding success, which fetched the government about Rs 9,000 crore. Ironically, the second bundle was cancelled after it got a tepid response from investors. The third (which is awarded) and fourth that were expected to garner about Rs 10,000 crore by the end of fiscal 2020, are yet to be completed.
Now, with the COVID-19 pandemic and its economic implications, one wonders if the private sector would be enthused to participate in such TOT projects, at least for some time. On the one hand, liquidity is choked as the private sector battles with difficulties to raise finance from institutions. On the other hand, toll revenue prospects are hazy. Rating agencies too have a negative outlook on most toll developers, which would exacerbate their woes.
These factors may even put NHAI’s plans to raise funds through Infrastructure Investment Trust (InvIT) and securitisation of toll revenue to access long-term borrowing from banks, on the back burner. Until a few months ago, the plan was to complete TOT awards and InvITs over fiscal 2020 and 2021.
Furthermore, with the pandemic curve rising and healthcare taking precedence in budgetary spends, the allocation to infrastructure may be compromised.
The NHAI’s problems do not end with funding constraints. Expenses too are rising. “Land acquisition costs, which account for 30 percent of the NHAI’s total expenses have risen in recent past. This along with engineering, procurement, construction (EPC) projects has increased expenditure for this nodal agency in road development,” stated analysts at the ICRA, in a report released before the lockdown.
The moot question is: given these hurdles, how would the agency achieve its ambitious highway development programme under the Bharatmala Pariyojana? The overall plan is to develop 65,000 km of national highways, of which 34,800 km will be completed in five years under Phase-1 (fiscal 2018-22) at an outlay of Rs 5,35,000 crore.
Here again, the NHAI has been mandated about 27,500 km, which is by no means small, that too under the current gloom. Most analysts envisage a delay of two to three years in achieving the first phase target itself.
Yet, the only saving grace is the government agency’s credibility in the market, which enables it to borrow funds through the internal and extra budgetary resources. Sources say that it would mop up about Rs 75,000 crore in this fiscal. Although debt has been rising over the last couple of years, the debt-to-equity ratio is comfortably poised below one. Even so, its debt servicing ability is tied to some extent to the toll revenues, which for a couple of years will not grow at the compounded rate of 11-12 percent seen in fiscal 2016 to 2019.
In this context, the recent increase in road and infrastructure cess (after COVID-19) may bring some relief for road projects and the NHAI.
Apart from this, the NHAI has faced hurdles in land acquisition too. This has delayed projects after they were awarded. Such issues will put prospective bidders on the back foot. In fact, this is one of the reasons why the NHAI’s pace of awards fell to about 2,400 km last fiscal, which is about a third of the decadal peak scaled in fiscal 2018.
Industry analysts expect awards to remain subdued even in the current fiscal year, given the funding challenges.
Indeed, the NHAI prides itself in achieving an all-time high of 3,979 kms of highway construction in FY20, the highest since its inception in 1995. However, this is because of strong awards in the earlier years coupled with fast-paced execution, both of which are absent in the current pandemic environment.
Vatsala Kamat is a freelance journalist. Views are personal.
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