How NHAI plans to dodge a debt trap

When it was inaugurated on 12 March, a lot of the social media chatter was about its scale and impact—it cut down travel time between the two cities to just 75 minutes, from over three hours earlier.

A couple of months later, the buzz on social media changed course—those using the highway grew increasingly critical.

From 1 June, the National Highway Authority of India (NHAI), the central authority that develops, maintains and manages the national highways, quietly revised the toll rates. A one-way journey by car on the expressway was revised to ₹165 from ₹135 earlier; the return journey to ₹250 from ₹205 earlier. That’s a hike of 22%, much higher than the annual 7% toll fee hike that NHAI had implemented in expressways across the country in 2023.

Two months later, on 1 August, the toll rates went up again as a second toll plaza was made operational at Maddur, a town 60km from Mysuru. For a one-way journey, commuters now pay ₹320; the return journey costs ₹485. At ₹2.69 per km, the expressway is now one of the most expensive stretches in the country.

“We pay road cess, besides all the other taxes that the government collects. Then they build a highway and charge high toll rates which keeps going up every year," said Anand Iyer who uses the expressway daily. He works in the industrial belt of Bidadi, on the outskirts of Bengaluru.

Behind the need for NHAI to raise toll for the Bengaluru-Mysuru expressway or any other road in the country, is a simple fact—its burgeoning debt. In the last eight years, the organization has built more roads than ever and single-handedly shouldered the burden of meeting the government’s gigantic targets of constructing highways. But in doing so, it has borrowed money from the market and ran up a substantial debt profile. Between 2014 and 2023, its debt has rocketed from just ₹23,797 crore to ₹3.43 trillion.

Concerned with its debt overhang, the government has now forbidden NHAI from borrowing from the market. Instead, it is being encouraged to monetize its assets and become self-sufficient. But in a market where response from investors to long gestation projects like highways is often lukewarm, will NHAI find a way to be successful?

The debt pile-up

NHAI’s debt is so long term in nature that it would only be cleared by 2049-50. But beyond 2029, the pressure would start to ease off—provided it does not borrow more in the interim. The next few years will be critical.

Based on what the agency has borrowed so far, NHAI’s payment obligations will balloon over the course of this decade. By 2050, with the interest accounted for, NHAI needs to pay over ₹6 trillion to clear its dues. From ₹33,342 crore in 2023-24, its repayment liability will peak at ₹62,000 crore in 2028-29.

The debt overhang is a result of the increased pace of highway construction that NHAI has undertaken in the last decade. After the lull between 2012 and 2015 when NHAI’s highway construction declined to 1,500km a year, it has gradually picked up pace both in awarding new projects and in execution. In 2022-23, a record 4,882km of highways were built.

“Nobody should grudge the debt that NHAI is carrying because it is a result of the highways that have been built over the last few years and the debt is backed by solid assets," said Vinayak Chatterjee, founder and managing trustee of the Infravision Foundation, an independent think tank with expertise in infrastructure-related sectors. Chatterjee was earlier the chairman of Feedback Infra, an infrastructure services company.

“Is the large debt a worry? I would say no. The assets are all revenue yielding but the time has come to squeeze the lemon and monetize them to restrict and reduce the debt," he added.

NHAI relies on government funding for large projects but a gap has opened up between the budgetary support and NHAI’s expenses since 2018-19. This suggests that costs have gone up higher than expected. This isn’t surprising as both the cost of land acquisition and that of constructing projects have increased on account of higher prices of raw materials like steel, cement and fuel. The gap is, however, an indication that while it can count on the government to fund ongoing and future projects, it will need to find ways to repay the debt through asset monetization.

“The government has restricted NHAI to raise funds through market borrowings since 2022-23 and has provided additional budgetary outlay to bridge the funding gap. Thus, reduction in debt servicing has already started and there shall be no further increase in the debt at least till 31 March 2024," said Vinay Kumar G, vice president and sector head— corporate ratings, ICRA Ltd. “Nevertheless, NHAI will remain dependent on budgetary allocations and fuel cess for keeping its financial profile intact," he added.

Monetization plan

So how does NHAI intend to raise the amount needed to pay its debt? Its big bang monetization plan rests on three pillars—the toll-operate-transfer (TOT) model; the infrastructure investment trusts (Invit) bonds; and toll securitization.

Under the TOT model, stretches of operational highways are auctioned in bundles to private players for a specified time and NHAI gets a lump sum for it. So far, it has managed to raise over ₹26,000 crore through 11 bundles—over ₹10,000 crore have been generated in the last fiscal alone. But the success of this model is patchy and auctions have had to be cancelled in some cases due to NHAI’s aggressive traffic projections.

The agency has also raised over ₹10,000 crore through Invit in the last two fiscals. Invit are instruments on the pattern of mutual funds, designed to pool money from investors and invest in assets that will provide cash flows over a period of time. Investors, in turn, earn a small portion of income in return.

Launched in November 2021, NHAI Invit had raised ₹7,350 crore in its maiden round, with an initial portfolio of five operating toll roads aggregating 390km. In 2022-23, three additional road stretches were transferred and the portfolio grew to eight operating toll roads aggregating 636km.

This model has been reasonably successful and has attracted investors as diverse as Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan Board, State Bank of India, SBI Pension Fund, SBI Mutual Fund, IOCL Employee Provident Fund, L&T Staff Provident Fund, Rajasthan Rajya Vidyut Karamchari Pension Fund, TATA AIG and Star Union Daiichi Life Insurance.

NHAI also uses toll securitization where it gets an upfront payment for highways that are under construction while the investor/lender gets the money back through toll revenue generated in future.

This has garnered the maximum capital in the last three years at nearly ₹34,000 crore. For the current fiscal, NHAI is targeting to raise ₹45,000 crore split equally between the three monetization models.

“The road sector offers the best investment opportunity in India because unlike other sectors, the overheads are less and the only big hindrance is land acquisition. Once that is done and the road is constructed, toll revenue is generated automatically," said B M Rao, chief general manager (finance), NHAI. “Also, unlike other industries where raising the price of a product is dependent on market forces, here, toll rates are raised every year as per a prescribed formula. Many investors are interested because they see high potential in this sector," he added.

NHAI’s revenues from toll have indeed gone up in the last five years (see chart) with the addition of new expressways like the Bengaluru-Mysuru and the Delhi-Meerut expressways. In the next few years, it will also get a shot in the arm as a number of build-operate-transfer (BOT) projects, dating back to 2000-2010, will return to NHAI’s fold. In these projects, private contractors build, operate and collect toll from the highways for a specified period, typically 15-20 years. There are around 150 such projects in the country.

“These are all high traffic and toll bearing roads—like some sections of the Golden Quadrilateral (which connects the four metropolitan cities of Delhi, Mumbai, Kolkata and Chennai). So, the revenue from them is high," Rao said. “Every year, two-three such projects would come back to our fold."

The success of the monetization plan, however, rests on a number of factors. In the past, quite a few TOT bundles found no takers as the traffic projection by NHAI was seen to be too optimistic. Any delay in project completion or cost over-run—not uncommon in large infrastructure projects—also upsets the math.

“Although the private sector participation in the TOT bids is satisfactory, there are recurring instances of disconnect in valuation between NHAI and private sector bids. Five TOT bundles were cancelled by NHAI as the bid value was lower than its estimates," said Vinay Kumar of ICRA.

The toll on building

The impact of NHAI’s shift in focus—from awarding new projects to executing the ones already underway and monetizing them—could be on the pace of highway construction.

The rate of projects awarded in a year has already begun to flag (see chart). Analysts believe that this is likely to exacerbate this year due to the impending elections when new projects generally cool off. If a smaller number of projects are awarded today, there will be fewer projects to execute, going ahead. The pace of construction will begin to taper.

As per Icra Research, the award of road and highway sector projects is expected to decline by a sharp 25% in 2023-24. It estimates that only around 9,000km of highways may be awarded during the year, as against over 12,000km awarded in 2022-23.

“The pace of highway development in the country depends on the government. They decide how many kilometres of highway need to be constructed in a year and make budgetary provisions accordingly," said Rao of NHAI.

Private matters

The private sector can help NHAI reduce the risk but many private companies have lost interest in building highways. Between 2000 and 2013, the BOT model was the preferred mode. But soon, disputes cropped up due to land acquisition hassles, delays and cost overruns.

Ever since, NHAI has taken all the risk associated with building highways, either through the engineering, procurement and construction (EPC) mode, where it pays full amount to private developers, or the hybrid annuity model (HAM), which is a mix of EPC and BOT.

Under HAM, NHAI releases 40% of the project cost and the developer brings in the rest. In both EPC and HAM models, the financial risk and the responsibility of toll collection is with NHAI.

The government is now making efforts to revive BOT projects by offering more flexibility and relaxed terms to the private sector but it is still not certain if they will bite the bullet. Estimating future revenue from a new patch of highway remains a lottery.

“In the medium to long term, there are two trends one should be wary of. The government’s focus on sustainability means that some of the freight will move to railways in the future. So, that is loss of potential business," said P Pranavant, partner, Deloitte India. “Second, state governments are also making good roads that compete with national highways and can snatch away traffic. It could potentially stunt growth in toll revenue," he warned.