Financing national highways

The National Highways Authority of India (NHAI) is arguably one of the country's biggest successes. In fact, it's perhaps one of the rare successes with PPPs in infrastructure. The NHAI built around 13000 km of roads, or 37 km per day, in 2020-21 compared to 11000 km in 2019-20, and has built 2284 km in Q1 of 2021-22 compared to 1823 km a year ago. However, this pace of its growth may be raising concerns about the sustainability of its success. 

Business Standard has a report that raises questions on the sustainability of NHAI's current operating model. The article informs that NHAI's debt rose 27% to Rs 3.17 trillion at end of FY21 and toll revenues declined 4% to Rs 26000 Cr, thereby raising the gap between its financial liabilities and internal accruals from 2.1X in FY14 to 12.3X in FY21. The debt is expected to reach Rs 3.8 trillion by end of FY22. This is the concern for NHAI,

The NHAI’s borrowing has gone up seven times in the last five years, growing at a compound annual growth rate (CAGR) of 47.6 per cent from Rs 45,300 crore at the end of March 2016. In the same period, its toll revenues have grown at a CAGR of 7.3 per cent from around Rs 18,150 crore in FY16. The growing gap between toll revenues and NHAI borrowing is however a recent development. For a decade between FY05 and FY16, NHAI toll revenues grew faster than its debt, allowing it to maintain a healthy balance sheet. In 10 years between FY06 and FY16, NHAI annual revenues jumped nearly 23 times growing at an annualised rate of 36.7 per cent. The revenues jumped from Rs 798 crore in FY06 to around Rs 18,150 crore in FY16. In comparison, its borrowing was up 11X during the period, from around Rs 4,000 crore in FY06 to around Rs 45,300 crore in FY16.

NHAI depends on fuel cess, additional budget support, and toll revenues. It has embarked on an ambitious asset monetisation drive to augment its revenues.

The NHAI's success has been its simplicity. Long term BOT concessions financed through a combination of road cess levied on gasoline and toll revenues, supplemented with additional budgetary resources. As the pipeline of concessioned roads has grown, there is a belief that large amounts can be raised by unlocking value by monetising them and off-loading (the asset and its debts) from NHAI's balance sheet. 

This is fine as long as the liabilities are matched by the accruals. It means that the expenditure of NHAI, including debt service, should be balanced by internal revenues and budgetary support. 

R (Revenues) = C (Cess) + T (Toll) + M (Monetisation) + Budget (B) 

R = E (Expenditure) + D (Debt service)

Or

Rate of growth of revenues > Cost of capital 

There are some problems on the revenues side. T is what it is, though it has a cyclical component in sync with the business cycle. For all the optimism, M is unlikely to realise anything close to the large amounts being expected. The envelope of domestic capital interested in such assets is small, and that of foreign capital smaller still. The numbers are explained in great detail here.

This leaves us with C and B. Both have to increase in proportion with the pace of road construction and debt assumption. If you want to ramp up highways construction, increase road cess and allocate more in the budget. This is both an accounting and historical reality from experience across the world, and there's no way around it.