Taking account of NHAI's Rs 3.38 trillion debt will help govt look better

While the Centre has taken FCI's debt on to its books, the NHAI debt load is not only larger, but also has different dynamics altogether

The normally voluble minister for road transport and highways, Nitin Gadkari, has been giving cryptic answers this month in Parliament, on only one topic. It is about the financial health of National Highways Authority of India (NHAI). It is a Rs 3.38 trillion question. 

The outstanding debt of India’s road builder has reached this amount as of November 2021. Among all government-owned or parastatal bodies, this is the largest debt overhang, a good Rs one trillion more than the next one, which is of Food Corporation of India (FCI). It has created a challenge for the finance ministry. Should it ring the alarm bell and take some of the debt on to the government books or should it still show it as an off-budget liability? 

It has done so for FCI too but the NHAI debt load is not only larger, but also has different dynamics altogether. 

Unlike FCI, NHAI generates revenue. The success of the NHAI is also crucial to India’s projected Rs 111 trillion of infrastructure asset generation under the National Infrastructure Pipeline till FY25. 

The plan is simple. Roads are being built by NHAI by raising debt and then those are put out for monetisation by bidding them out for tolling by investors under various models like Infrastructure Investment Trust (InvIT) or Toll Operate Transfer (TOT). Till FY25, the centre hopes to generate Rs 1.6 trillion by monetising 26,700 km of national highways of four lanes and above. 

Economics of road monetisation

It is this debt generation that is coming up as a concern. NHAI is an autonomous body, set up by an Act of Parliament in 1988. Its debt is accounted for in the books of the Authority but guaranteed by the Government of India. Beyond a point, lenders start getting skittish about the guarantee. Also if the government does not add this debt to its above-the-line accounting, the corresponding budget numbers start looking hazy for overall fiscal prudence. All of these questions about the size of the debt would not have mattered had the corresponding revenue stream been robust. 

This is the challenge. In the current financial year, for instance, the NHAI was able to monetise only 840 km. Of this, 390 km was under the Infrastructure Investment Trust (InvIT) model and 450 km through the Toll Operate Transfer (TOT). The expected backlog is about 4,912 km as per the data of Gadkari’s ministry. Every time there is a question from Parliament members on this, the ministry therefore just answers very briefly. 

Over the past few years, the road sector has been one of the sterling performers in the economy. From 2,623 km built in FY17, the pace has jumped to 4,175 km in FY21. Yet it is this furious pace which has mounted a greater stress on NHAI. The Authority’s leverage has risen to 1:5 by November this year. This pace will rise even further to keep up the target of the National Infrastructure Pipeline. “NHAI’s fund requirements are expected to double to Rs 10 lakh crore (Rs 10 trillion) over the next five years vis-à-vis the previous 5 years,” notes lead author Isha Chaudhary, Director in a Crisil Research report. 

NHAI’s revenue-raising challenge comes because half its road assets are less than five years old. The same Crisil report shows their average revenue each is of Rs 46 lakh per km, as of fiscal 2020. Those will improve as traffic builds up. Like most infrastructure assets, incomes from roads take time to settle into a yearly pattern. But this creates a short term mismatch for NHAI. 

The projects it has bundled out under InvIT are the older ones where traffic has expanded. Even among them, those which found bidders were the ones where the revenues have crossed Rs one crore per km. Of the eight bundles bid out, only three have seen such levels of traffic and were picked. Three other fell through since the toll collections, though growing healthily, still average less than Rs 70 lakh per km. Those would improve with the growth rate of the economy with larger demands for freight and passenger traffic. NHAI data shows as of now about 38 per cent of its projects with a history of over six years of toll collections have reached this magic figure. 

This is the difficulty most infrastructure projects are facing, except airports. Passenger traffic has built up in airports so their revenue stream has taken off. The longer time frame is uncomfortable for the lenders as they want their money back sooner. 

The government has to ensure NHAI is not seen defaulting or even re-negotiating its debt with the lenders. Unlike the power sector where such rescheduling has killed the appetite among banks and NBFCs to lend, the government is keen roads should not fall into the same trap. 

Meanwhile road builders are happy: 

The stress on NHAI is not shared by the road builders. To make construction of road projects remain attractive, minister Gadkari had developed a hybrid annuity model. It  reduced the risks for road contractors with a promise of almost guaranteed returns. A CARE Ratings report on the sector notes, these relaxations in the bidding criteria and changes in the model concession agreement “intensified competition in the bidding…The number of maximum bidders rose to 20 in FY21 as against maximum 10 bidders till FY20. Competitive intensity continued to remain high during H1FY22”. 

So the conundrum is clear. By taking on larger debt, NHAI has kept the capital structure and debt coverage indicators of road developers strong on account of low-to-moderate reliance on debt. They have also been able to monetise their assets aiding their balance sheet, a far cry from their difficult conditions a few years ago, when many projects could not find bidders or even successful bidders surrendered what they had won. Looked at from their point of view the outlook for the sector is stable.

But this has come with a cost. NHAI’s debt load has rapidly expanded to finance these hybrid annuity models. Of the about 25,700 lane km awarded by NHAI between the four years of FY16 to FY19, around 90 per cent are on this model. They cost about Rs 1,20,400 crore as per a Care Ratings analysis. 

The finance ministry has to take a call on how much of this load it will take on its books this time. This will be capital expenditure compared with the debt overhang of FCI, entirely on a revenue account. The sum at stake could be close to Rs 1.6 trillion as painted in the National Monetisation Pipeline. It could potentially meet 15 per cent of NHAI’s fund requirements over the next five financial years. The finance ministry has to create this space.