The worsening debt situation at the National Highways Authority of India (NHAI) was being spoken about in hushed tones for long. But it may not have become apparent if the PMO had not summoned the top brass of NHAI and the ministry and asked them to stop road building and focus on monetizing their existing assets. What exactly is the issue and what is the background to this massive pile up in debt?
NHAI debt: the big picture
The NHAI was conceived by Vajpayee government as a catalytic force to give a boost to the Golden Quadrilateral road network across India. It did a great job of catalyzing growth but something has changed in the last few years. Just look at the numbers. In March 2015, the NHAI had total debt of Rs.24,800 crore. In the last 4½ years since then the total debt burden of NHAI has burgeoned to Rs.178,000 crore. Speaking on the topic the former NHAI chairman underlined that this 7-fold increase was due to 3 reasons. Firstly, the government had embarked on an aggressive road expansion drive under Mr. Gadkari. Secondly, the toll fees and the ROI were not growing as fast as the debt of NHAI and created a piquant situation. Lastly, NHAI was caught in litigations and that had seriously impacted its own working capital as well as its contractors. It is in this background that the PMO had intervened and sought to take quick and decisive action on this subject.
Why this is a Catch-22
A Catch-22 situation is one which does not permit a solution. You keep going in circles. The former Chairman of NHAI admitted that Rs.178,000 crore debts was just the tip of the iceberg. NHAI also had contingent off-balance sheet liabilities to the tune of Rs.65,000 crore. Since most contingent liabilities are shown at a percentage, the former head estimated that the actual value of these contingent liabilities could be closer to Rs.300,000 crore. When you add this to the existing debt on the books of NHAI, the gravity of the situation becomes quite clear. Most of these contingent liabilities pertain to legal cases where there have been cost and time over-runs and contractors had demanded compensation. Hence, this was leading to tight working capital conditions for contractors and any solution would mean recognizing these liabilities. That makes it a perfect Catch-22.
A cost-revenue mismatch
In the last few years, the cost of land acquisition had gone up geometrically. That was adding to the costs. But the problem was that the toll fees and the returns on these projects were not keeping pace and the working capital shortage was making it worse. With funds down to a trickle from banks for infrastructure projects, the PMO is bang on target. It is time to monetize assets and shift to an asset-light model! ©