Red signal for NHAI

Its debt-fuelled expansion is a reason for worry

The Prime Minister’s Office (PMO) has reportedly expressed concern regarding the ballooning of debt and unplanned and excessive expansion of the National Highways Authority of India (NHAI). Given past political risks in the roads sector and a debt overhang that affects many private contractors, equity from the private sector has been hard to come by. Thus, the NHAI has had to turn to paying directly for highway-building using the “engineering, procurement and construction”, or the EPC model. This has led to a debt build-up that is large — indeed, of proportions that it can affect the overall systemic stability. Debt may reach Rs 2.5 trillion soon, and interest payments alone might be Rs 25,000 crore from now on.

Forget about paying down the debt, it seems difficult to see how the interest payments will be met, because according to SBI Caps, revenue from toll collection is only growing at 6 per cent a year. The market is increasingly unwilling to bear the NHAI’s additional borrowing, which is expected to be Rs 75,000 crore this year — dwarfing the contribution from the Union Budget of Rs 36,700 crore. It is thus increasingly dependent on state-controlled pools of finance like the National Small Savings Fund, which might give it as much as Rs 40,000 crore of the Rs 75,000 crore. 

The Ministry of Road Transport and Highways appears to be quite sanguine about these numbers, noting that the NHAI continues to be rated AAA, and that it has had no trouble repaying debt or meeting increasing fundraising targets. The ministry is quite correct about these points. It is also correct that highway-building cannot grind to a halt, given its importance for the broader economy and employment generation. Even so the concerns of the PMO — and similar worries raised by the Comptroller and Auditor General — need to be taken on board. The NHAI, faced with a shortage of risk capital and constrained budgetary support, has nevertheless seemed to imagine that it can take on as much debt as it likes in order to finance a continuing expansion. But the high credit rating is because the NHAI is considered to have a quasi-sovereign guarantee. The contingent liabilities of the NHAI, therefore, are of importance to the government as a whole and not just the Authority or its nodal ministry. The problem is that there is no transparency as to what the total contingent liabilities might be — while rating agency ICRA has estimated it at Rs 63,000 crore, some estimates from insiders put it as high as Rs 3 trillion. Compensation from cess funds has also been lower than land acquisition costs for the past few years. Land costs now make up roughly a third of the total spends and have nearly doubled to Rs 3 crore per hectare in the past three years. 

Before taking on further debt, the NHAI should be more transparent about its accounting to the public. The facts must be known, including the degree to which the NHAI’s debt burden impacts the broader ecosystem. Anecdotal evidence that the NHAI has been withholding payments, for example, can cause contagion elsewhere in the system. This, combined with publicly visible difficulties building up in meeting interest payments, has the potential for systemic disruption. Further freeze-ups in debt markets, already roiled by the fallout of the collapse of IL&FS, must be avoided.