The NHAI Crisis Part 4: The Problem with NHAI's Financials
The worry with financials of National Highways Authority of India (NHAI) is because of the scale and speed at which the NHAI debt has risen. As reported in Moneylife, NHAI’s debt soared from Rs40,000 crore in 2014, to Rs1.78 lakh crore by 2019. The estimated contingent liabilities suggest that the figure could be close to Rs5 lakh crore. The reasons why the balance sheet expanded lie in the way NHAI's projects are structured. 
 
Project Structure Leads to Bigger Balance Sheet
 
Till date, NHAI has used different types of project contracting methods. 
 
Under the build, operate, transfer (BOT) method, the contractor incurs all the costs and creates all the infrastructure for the specified roads. The investment is recovered in the form of tolls. Under this model, private players bore the entire cost of construction (road and allied infrastructure) and operation but not land acquisition. This kept the NHAI balance sheet quite lean. However, because of cost escalations and below-par toll collections, private players were reluctant to bid for these projects.
 
In response, NHAI started awarding contracts on the annuity method, also called BOT-Annuity. This method is similar to BOT method, i.e., the contractor invests in building the road and allied infrastructure. However, in return, the contractor gets specific annual payments from NHAI (in lieu of tolls) and toll is collected by NHAI's contractors. Thus, NHAI takes the toll collection risks and, therefore, the potential returns on the investments. (Sharp Moneylifers must have already sat up!)
 
Another simplistic method used is engineering, procurement and construction (EPC) contracting. Here everything is fixed and the cost is paid by NHAI directly to the contractors based on the successful bid. The terms of payment may differ from contract to contract (lump-sum vs equated payments). The returns from this project are entirely the responsibility of NHAI.
 
Recently, NHAI has shown a preference for the hybrid annuity model (HAM). As the name suggests, it is a mix of EPC (40%) and BOT (60%) models. Here the cost of construction (road and allied infrastructure) and operation is shared between NHAI (40%) and private contractor (60%). The private party is paid in specific annual payments. Even in this method, the returns from the project are entirely the responsibility of NHAI.
 
If NHAI had functioned exclusively on the first BOT model, its balance sheet would have reflected mostly the cost of land acquisition. In the BOT-Annuity model, NHAI bears the risk of land and annual payments. In the EPC method, NHAI has to bear all the costs on its own balance sheet. The HAM model requires NHAI to bear the cost of land, 40% of construction costs and specific annual payments.
 
As reported by Moneylife, SBI Caps estimates that the land acquisition cost has gone up 30% annualised since 2013. So have construction costs. Then there is cost escalation for delays. Further, the number of projects undertaken by NHAI has risen dramatically. In the light of these variables the speed and scale of NHAI’s balance sheet is not unreasonable. 
 
But Big Balance Sheet Is NOT ALWAYS a Problem
 
If the big balance sheet is translating into earnings, then big balance sheet is not a problem. In an ideal case, each project viability is understood before the project is flagged off. Therefore, NHAI projects should generate enough tolls to sustainably service the debt and leave a surplus to invest in new projects. Thus, ideally, NHAI will generate its own revenue to pay off its debt and finance new road projects. In such an ideal scenario, infrastructure will continue to improve as money is not a constraint. However, we are not in an ideal case because of many reasons. 
 
First, the NHAI is spending too much to build these roads, may be because of cost escalations as against the budgeted amounts. 
 
Second, NHAI is building too many roads. The lack of infrastructure, the economic stimulus provided by infrastructure investment in a slow global environment, and the need to improve economic efficiency pushed this government into aggressive road building. 
 
Third, NHAI is not earning as much from earlier, stable projects to pay off the loans taken earlier. This is because traffic is not as much as predicted and tolling losses are high for various reasons that we discussed in previous articles. 
 
Fourth, because NHAI's road assets are not performing well, they cannot be sold either through the Infrastructure Investment Trust (InvIT) or through the Toll Operate Transfer (TOT) model. Thus, there is no way to get the 'completed' projects off its balance sheet.
 
The net result is that its balance sheet is growing faster than is comfortable.
 
The Real Problem Is Different
 
Per se, the size of NHAI balance sheet is not a problem. The problem with NHAI is not its ability or intention to pay; it has both. It also helps that NHAI is a government agency and not a separate listed company. The loans on NHAI's books are, technically, loans of the government. The assets (lands, roads and road infrastructure) belong to the government. Thus, technically, there should not be any problem. 
 
If you consider any private company, its assets earn enough revenues to provide for profits and future investments. For NHAI, that is not happening. The returns from previous projects are not enough to cover the costs of NHAI and NHAI requires funding continuously. As reported by Moneylife, at present, NHAI’s key source of funds continues to be public sector institutions, banks and pension funds. This presents a grave risk for taxpayers.
 
With assets performing below expectations, NHAI is forced to keep them on its books. With such a financial overhang, NHAI’s size may affect its ability to invest profitably in new projects. It may, thus, affect future infrastructure development and financial viability of NHAI itself.
 
NHAI, being an infrastructure company, will not be as profitable as a private company. However, it should not be a capital sink for taxpayers' money. We expect NHAI to be self-sustaining. The real problem is the return on the investments that NHAI is making. The solution is simple in concept but tedious to implement. NHAI needs to make its projects perform better. We will discuss how, in the final part of our article.
 
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(Rahul Prakash Deodhar is a private investor and Advocate, Bombay High Court. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.)
Comments
Nagaraju Bommanahalli
2 years ago
In few months one more huge scam will be coming out , because all infrastructure companies taking huge fraud loans from various Banks, mutual funds, NCD etc and made huge fraud, this fraud is also like kingfisher airline scam.infastructure invester also loose huge money.

I will ask both both parties please reply ,how much money recovered till today by selling assets of fraud persons who taken huge fraud loans,how much money returned to the bankrupted bank account holders , don't do drama,my friend lost several lakhs from Alpic finance a NBFC in twenty five years back, but till today he have not received single paise , this Alpic finance company is a subsidiary of Cipla group, this NBFC done huge fraud,but till today no action taken, these companies go to court and take stay order for the sale of theirs assets, Court will drag the case to twenty to thirty years at that time all investers will die, these fraudessters enjoy our loot money with political leaders, these are all drama nothing will happen only poor will die , why not Auditors arrested who have been submitting manuplated Audit reports by fabricating balance sheets. Even concerned officials from RBI are also equally liable for this situation. We need to initiate proper legal steps to compel RBI to immediately resume normal operations of Bank.
In India nobody knows how Indian companies are doing fraud from the beginning to last ,for example a big business men will start the company in India as below .His companies actual value is Rs2000crores but with the help of the auditors,Banks,and chartered accountants he made his company s values to RS 6000 crores by book adjustment with bribe and he call IPO that is in share market and collect Rs10000 crores in share market, first he pumped 60%of money to foreign country in the name of business and will deposit most of the money in his name next he will file bankruptcy due to losses and will write off all the loans this is the business doing in India ED is doing drama ICICI Bank chandakochar is well known to all she done huge fraud in ICICI Bank, this drama of enquire is doing from past one year, but still she is not arrested, reasons In this icici bank scam all SEBI auditors ED RBI central government rating agencies
big leaders of all parties involved.central government making all efforts to avoid arrest these fellows,if arrested all all foreign country become knows most of the Indian companies running on bogus and take away all foreign investment,then India become bankruptcy.This is well known by central government hence avoiding all efforts to arrest directors of icici bank chandakochar DHFL jetairways Videocon kingfisher airline PNB bank head [email protected] etc .even Vijaymalya kingfisher airline companies don't have single plane in his companies name but all banks gave Rs10000 crores money, same type loans gave to jet airways,DLF, Devan housing finance company,[email protected],fs,etc wait in few months most of the common people investment in icici bank NBFC PSU banks equity NCD mutul funds become Zero,All parties RBI officers, SEBI, etc are corrupt they are taking India towards bankruptcy
Ramesh Poapt
Replied to Nagaraju Bommanahalli comment 2 years ago
dear, alpic finance did make offer to refund money to investors.
pl. check records again.
Nagaraju Bommanahalli
Replied to Ramesh Poapt comment 2 years ago
No I haven't received
priyanka
Replied to Nagaraju Bommanahalli comment 2 years ago
Well said
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