Private investment in roads seen to pick up as Centre slows capex increase plan

The increase in allocations may range between 5% and 10% of the FY24 (revised estimate) level of ₹2.64 trillion, the people added. 

While that is a moderate raise, it would still be a fair bit higher than the 3% increased allocation proposed in the interim budget.

The modest raise is being considered as the government expects a significant increase in private investments in road construction projects being awarded under the build-operate-transfer (BOT) toll model, the people cited above said. 

“We are expecting 20-25% of highway project awards this year to be on the BoT (toll) model," the first person said on condition of anonymity. “This would relieve the pressure on the government to spend on its own for such infrastructure development."

According to data from the ministry of road transport and highways (MoRTH), private investments in roads reached ₹34,805 crore in FY24. The government expects this number to almost double in FY25. 

Back of the envelope calculations (based on 1.5X growth in FY24 over FY23, as the government did not release FY23 numbers) showed private investments were at ₹23,000 crore in FY23. 

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“Money will continue to be spent by the government, but with more private investors (coming in), central capex could go into more critical infrastructure projects and ones that have strategic interest attached to them," said the second person cited above.

BOT (toll) projects allow private sector bidders to collect toll to recover their investments over a long period of usually 20-30 years. Consequently, this allows them to take the risk of putting in money to develop road projects, and relieves pressure on the government to spend more money on roads.

Queries sent to MoRTH remained unanswered till press time.

Foot on the pedal

In the interim budget presented this February, the central government had increased the allocation for the ministry of road transport and highways a mere 3% year-on-year to ₹2.72 trillion for FY25, from ₹2.64 trillion (revised estimates) in FY24. The allocation for FY23 was at ₹2.58 trillion. 

The higher allocation of 5-10% being mulled this fiscal is expected to be used by the ministry both to step up construction of highways as well as retire the high levels of debt accrued by the country's nodal road building agency, the National Highways Authority of India (NHAI). 

As per data from government data, NHAI's debt had ballooned to ₹3.5 trillion at the end of FY24. 

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The government plans to construct 12,000-13,000 km of national highways in FY25, while awarding contracts for about the same levels so that the pace of construction is maintained in subsequent years.

Encouraging private participation in roads

According to ratings agency Crisil, as the government moderates the budgetary allocation for roads, it has made amendments in the BOT toll model concession agreement to increase private participation. 

However, improvement in traffic estimation accuracy and any increase in the willingness of lenders to fund BOT toll projects will also bear watching, the ratings agency added.

“As fundamentals remains strong, we do see a pick up in private sector capex. This should translate into a good response for roads projects being awarded under the BOT model this year. As a best-case scenario, we expect 20-30% of new highway awards this year to come through this route," said Mohit Makhija, senior director, CRISIL Ratings.

According to India Ratings and Research, budgetary allocation for the road sector has grown at a CAGR of 22% over the past decade, but it is seeing some moderation now. 

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In contrast, BOT toll as a model for infrastructure development is expected to grow from this year, with an estimated 20% of the highway contracts likely to be awarded to private players under this route. 

This would be similar to the number of contracts awarded to private players in 2016, after which contracts being awarded under the BOT toll model had almost stopped, as delays in land acquisition and other statutory clearances, coupled with faulty traffic projections, had resulted in projects becoming unviable for concessionaires, who had bid aggressively for projects.

A clear road map

A look at the expenditure pattern of MoRTH clearly shows that the balance of government spending has shifted towards capital expenditure over the past few years. In 2021-22, MoRTH's capital expenditure stood at ₹1.13 trillion, while revenue expenditure was just over ₹10,000 crore.

Comparatively, the ratio between revenue and capital expenditure stood at 50:50 in 2014-15. Since then, the MoRTH has increased its capital expenditure significantly, while revenue expenditure has gradually declined and is now flat at around ₹11,000 crore. 

Revenue expenditure is used for the normal running of government departments and the provision of various services. Capital expenditure is primarily for acquisition and creation of assets.

In 2023-24, over 96% (revised estimates) of the ministry’s spending was allocated for capital expenditure. It was at 95% in FY23 and 90% in the fiscal year before that.

MoRTH's allocation for capital expenditure further increased to 98% in the interim budget of FY25.

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Apart from a focus on capital expenditure, the quality of expenditure has also seen an improvement, with the maximum funds going to NHAI, which is mandated to build highways and expressways in the country. 

Out of the ₹1.24 trillion total allocation (capital plus revenue expenditure) in 2021-22, a substantial ₹57,000 crore went to NHAI, which was a jump of over 35% from the previous year. 

The total allocation to NHAI had further jumped to ₹1.42 trillion and ₹1.67 trillion (revised estimates) in FY23 and FY24, respectively, while the total allocation for MoRTH during these two fiscal years stood at ₹2.17 trillion and ₹2.76 trillion (revised estimates), respectively.

A bumpy drive

In the past nine years, the length of national highways in the country has gone up by about 60% from 91,287 km (April 2014) to over 146,000 km in March. All this has happened despite the adverse situation wrought by covid-19 restrictions and the heavy and long monsoon seasons in the interim years. 

Highway construction in the pre-pandemic period of FY20 spanned 10,237 km at a daily rate of 28.04 km. The pace of building roads increased during the first pandemic year (FY21), when lockdowns helped accelerate construction, to a record 13,327 km of highways, at a daily rate of 36.51 km per day. 

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In FY22, the rate slowed again to 10,457 km at 28.64 km per day. The road ministry had initially aimed to construct 14,600 km of highways in FY22, or 40 km per day. However, it later revised the goal to 12,000 km. Further, FY23 ended with the construction of 10,331 km of highways, at a rate of 28.3 km of roads being built every day in the year.

The government has allocated ₹111 trillion ($ 1.4 trillion) under the National Infrastructure Pipeline for FY 2019-25. The roads sector is likely to account for 18% of this capital expenditure.