India’s road-building programme, which was going places, could be stopped in its tracks. On the one hand, the prime mover—NHAI, or the National Highway Authority of India—is clearly financially stretched. Former chairman Brijeshwar Singh estimated that the contingent liabilities could be more than twice the hard liabilities of Rs 1.5 lakh crore. While this observation has been rebutted by the current chairman, it is evident the authority’s balance sheet is far from robust. The CAG pointed out the NHAI had failed to set aside the mandatory sum (half-yearly) from its income in a reserve fund. Unless budgetary support to the authority increases substantially, it will become more dependent on costlier market borrowings. As for concessionaires, few today have the financial wherewithal to support projects with an equity contribution; more importantly, they are unwilling to take on project risks. Developers want to work with the BOT-HAM (hybrid annuity model), where the NHAI takes on most of the equity risk, and also shoulders the responsibility of acquiring the land and collecting the toll. The HAM is much like an EPC, with the concessionaire having virtually no skin in the game; the equity contribution is sub-10%. That is one reason why banks are wary of extending loans to these projects.
The government launched the HAM because builders were reluctant to execute the plain-vanilla BOT (build-operate-transfer) projects. Not surprisingly, the share of BOT projects has come down sharply. In FY18, of the overall 7,397 km awarded by the NHAI, around 3,397 km was awarded under HAM, 3,791 km under EPC, and only 209 km under BOT. In FY19, the projects awarded through HAM slowed down to around 880 km of the overall 2,222km awarded, partly because of delays in getting the right-of-way, but also because financial tie-ups were not easy to come by. The authority now wants to re-focus on the BOT, but concessionaires may hesitate to participate in these projects. For one, their balance sheets remain stressed; most will find it hard to bring in equity capital, and even more will be unable to tie up bank loans. Even if NHAI comes forth to acquire the land—which it should—it is doubtful banks will lend to promoters who are stressed. The appetite for BOT, therefore, could be limited unless the model is tweaked.
One reason for the road-building programme losing steam is that after the revised compensation guidelines of 2013, land prices have soared. In 2017-18, they were Rs 3.8 crore per hectare, and moderated to Rs 2.5 crore in 2018-19 due to more greenfield related acquisitions. The high land costs have compelled NHAI to borrow more; market borrowings rose to Rs 62,000 crore in FY19, taking the debt to an estimated Rs 1.8 lakh crore from Rs 1.22 lakh crore in 2017-18, and a near-threefold increase over the debt in FY14. While the general elections slowed the pace of awards, the fact is that only 500 km of roads projects were awarded between April and July. That was on the back of a subdued performance in 2018-19, when only 2,222 km were awarded, down from 7,400 km in the previous year. In fact, construction rose just marginally to 3,320 km from 3,071 km in 2017-18. Even if NHAI is able to rustle up the funds, concessionaires will find it hard to do so.