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NHAI Will Rely On The Government For Funding ‘Ambitious’ Projects, Says Former Chairman

Brijeshwar Singh weighs in on the concerns raised about NHAI’s funding.

A worker hammers steel bars into place at an elevated highway construction site (Photographer: Qilai Shen/Bloomberg News)  
A worker hammers steel bars into place at an elevated highway construction site (Photographer: Qilai Shen/Bloomberg News)  

The National Highways Authority of India will have to rely on the government for funding “ambitious projects”, its former chairman said amid concerns of financial troubles at the road builder.

“We have budgetary constraints and that is something the secretary of expenditure will sort out. The government will give directions on what sort of expenditure path it wants and the form of funding which is optimal for the present state,” former NHAI chairman Brijeshwar Singh told BloombergQuint. “At the moment I don’t think we should really be commenting on what the government is going to do. We should be waiting to see what the government does and then comment on whether that’s a sustainable path or not.”

His comments come after a letter written by Prime Minister Narendra Modi’s former principal secretary Nripendra Misra to India’s road ministry said that road infrastructure has become financially unviable. NHAI is “totally log jammed” with unplanned and excessive expansion of roads, the letter had said. Misra stepped down two days after.

Misra’s letter is only talking about possible options for the NHAI, Singh said. “The only question to come up with PMO letter is one of sustainability. Have you taken on too much debt? How do you monetise your assets? What is the pace of land acquisition? These are operational issues.”

The overall question of funding the NHAI is something the government is seized of at the highest levels.
Brijeshwar Singh, Former Chairman, NHAI

Watch the full interaction here:

Here’s the transcript of the conversation:

Much has been talked about the PMO letter and NHAI. What have you summed up from conversations?

First, we should understand that as far as road construction is concerned, the centre has a very ltd role. It is a state subject under the constitution. centre intrudes only in this sphere of national highways which is mandated by the constitution and where there is national highway act which permits the centre to declare certain highways as national highways, much of what the angst about road constructions is about urban roads, Delhi has 10 million motor vehicles on road, there is traffic jam, and the story repeats in Calcutta, Bangalore, Mumbai. If you look at the productivity gains to the economy, you would get it from concentrating on urban roads at the moment and that is National highways have on the whole done very well and built more than 50,000 km of roads under NHDP. It will be crossing 60,000, it has impressive record over the last four years.

The only question come up with PMO letter is one of sustainability, have you taken on too much debt? How do you monetize your assets? What is the pace of land acquisition? These are operational issues. The overall question of funding the NHAI is something the government is seized of at the highest levels. It is good to remember that ministry of finance has a representative on the NHAI board, secretary expenditure is a part-time member of the board, and has a non-executive role. He certainly has access to all the data on debt. I think the Fin Min has always been in the picture.

Similarly, the NITI Aayog, which takes an overall macro view of construction and of the economy also has their CEO on the board. Any choice is really plugged into the government at the highest levels of the bureaucracy and political establishment. What the PMO has written is about possible options for NHAI.

The funding of any ambitious programme will always have to be largely on budget. We have budgetary constraints and that is something the secretary expenditure will sort out, government will give directions on what sort of expenditure path it wants, and form of funding is optimal for the present state. At the moment I don’t think we should really be commenting on what the government is going to do we should be waiting to see what government does and then comment on whether that’s a sustainable path or not.

Is it too early to preempt that road construction and as an activity would cool off over the next two three years?

No I think you’re asking me a question about the national highway construction there’s another set well I mean the majority of roads are not under the centre at all. They are with the state government and those roads continue to be upgraded the state highway is what we call major district or a minor district road and there’s a very important scheme called the Prime Minister’s Gram Sadak Yojana. so the road sector actually the national highways are just the tip of the iceberg.

Yes they carry a disproportionate share of the traffic which is why there’s always you think and can you fund it for tolling route which is the current model but the other roads are funded on budget. They are not tolled, they are done by the state governments entirely. And there’s an enormous amount investment going on in those sectors also so when you’re talking about the sector as a whole you have to take a completely wider view and not just look at the National Highway Authority.

When you’re talking about construction as a whole highways and roads are just one sector in it. There’s a very important real estate sector which also contributes to construction and there are other sectors also like irrigation power and things which come into the picture once you start talking about construction activity.

So it’s not that NHAI has has really been in somewhere kind of motor because it’s been doing 10 kilometers a day which was a fantastic achievement a 10,000 kilometers a year which is a fantastic achievement it’s been crossing even 20 kilometers and talking about 30 kilometers a day so these are really fantastic achievements compared to what we’ve gotten the sluggishness of the rest of the sector but the question is always should this be an engine of employment? Should this be an engine of growth? should you be doing only the high-traffic roads and there many many political questions which determine the fate of the program and the composition of the program. so I think it’s unfair to say that this is the whole of the construction sector it’s an important component but it’s not the whole of the construction sector and the rest of the sector is also proceeding and making progress.

Can the NHAI go out and build roads in areas which are not dense in traffic because roads are needed there. Is the the cost of the traffic out there is not good enough to compensate and return for the cost of the project undertaken?

Well the short answer to that is if you look at the Bharat Mala project that is precisely what is being attempted. Bharat Mala is very much an area-based project and there the traffic density is not the relevant factor. There the idea is to spread out the network throughout India and to provide connectivity even to small centres. Now that sort of thing cannot be funded through a tolling model. Because they simply don’t have the traffic densities in backward areas. That has to be done on budget and that is why as we keep emphasising the Bharat Mala project which answers your question and addresses the needs social inclusion horizontal equality regional disparity. That’s all taken care of by this sort of Bharat Mala visualisation but that has to be done on budget because there’s no way you can do that through a PPP model and most of the roads will not be fit for even a hybrid annuity kind of model. They may be having traffic densities too low to be self-sustaining on a tolling model so they’ll have to be done on different models. You may have tolls which may be kept artificially low, you may have so sort of cross subsidise. There are various options which you can explore but that is really the part of the program which will address the question of horizontal inequalities and horizontal equality.

In some part the PMO also suggested that going back to the traditional models and the BoT maybe in the reckoning. Do you think there will be takers for such models?

You can always cook up a BoT model if you make exaggerated traffic projections, but that is not the route NHAI is going to take, and certainly not the route the private sector will take. The private sector does its own traffic studies, and if it projects low traffic on the road, there are no takers for the BoT project. BoT projects are no doubt very important, but let’s not forget that when we started on BoT projects more than twenty years ago, they actually had a positive subsidy element. It was a bit like hybrid annuity because there was what is called a viability gap funding. This was up to 20 percent of the project cost. The Delhi-Gurgaon expressway was the first BoT project, where we started getting a negative viability grant. In fact, the successful bidders asked for money in exchange for building the project. This was followed by a whole series of projects where the viability grant funding turned negative. Yes, if you revive the BoT projects on some of these Bharat Mala stretches, you’ll have to do it through viability grant funding. Whether you do it through 20, 40 or 60 percent is a question the NHAI will have to work out. That is a certainly a question which the Ministry of Finance will have to look at very closely. The Ministry of Finance is very much part of the solution. They have to work pout how much can be allotted from the budget, how much from external budgetary resources and how much can be debt-financed. There’s always a mix going on of these elements. There is a second part of the equation: the financial health of the private players, which is entirely a different matter they are involved not merely in national highways, but also in real estate and a whole lot of construction activities. These are questions that I am certain the government will consider when they come up. We cannot predict at this moment what will happen. My feeling is Bharat Mala will have to be done on budget, it cannot through BoT projects because it’s going through very low traffic areas. Bits of Bharat Mala can be done with viability gap funding, it’s unlikely there are any bits in Bharat Mala where you can have a BoT project with negative viability gap funding, which is something NHAI has seen in the past, but I don’t think it’s likely to repeat very soon.

If a large portion of this Bharat Mala project or some other project that the NHAI may kick off on an ambitious note, are done on budget, should the expectation be that they will go slower than what they could have gone in the past?

Well government resources are inevitably limited and as we say you coat according to the cloth so that’s a fundamental feature of budget making. But government’s ability to borrow is much larger than see any GIS’s ability to borrow and what is government’s debt strategy what is the sustainable level of debt what is the rate of growth of tax revenues vis-a-vis GDP. These are all parameters which the Ministry of Finance looks at in in in great detail. I would point out that in fact the tax to GDP ratio has increased in the last five years compared to what it was in the previous ten years and government has been making a big drive to collect more taxes it’s not just GST I think income tax collections even direct taxes as a percentage of GDP have gone up a little bit. They probably haven’t increased enough many of the things which you are postulating or people like to dream about really presuppose very high tax to GDP ratios of 30 or 40 percent like in advanced country. Now in India that would be simply politically impossible and also administratively impossible but if we push up our tax to GDP ratios over the next ten years yes more and more of this can be done on budget. you can speed it up. if tax to GDP ratios remain as low as they are and they don’t increase fast enough you simply can’t do it. there is probably some leeway in external debt borrowing because external debt bottom to GDP is not a terribly high ratio. As far as internal data is concerned, yes you can probably probably have a lax monetary policy but the problem with that is that they are delays they are lags how it works into reviving the economy you know is a little unpredictable as far as the timing is concerned. so there are options before government and government will make an overall strategy how it wants to stabilize its budget. it’s been very clear-eyed once you give the budget deficit down. so within those limitations of the government strategy NHAI will have to fit its program that’s all it is.

Anything that you believe is a bit of a quick fix?

Road construction activity like motor vehicle industry is something of a bit of a barometer of the economy. I mean a motor vehicle sales are down is that a good thing or a bad thing from any choice point of view in certain cases they it’s a good thing because it produces your traffic congestion on certain highways, but for all of the economy as a whole yes it’s a barometer. Maybe the motor vehicle population which is very high you know I mean 10 million vehicles plus in in Delhi alone and over 200 million throughout the country but then if you’ve got a middle class which is just about 300 million you will reach a saturation level possibly over the next five to ten years unless the middle class grows. So and similarly the demand for highways will keep increasing because this is now a public good which people would like to have. but whether it’s remunerated from the tolling point of view is entirely a different question. So I would say that yes the economy will show some signs of slowing down but there are stimulus packages in the offing we can’t predict where the economy is going to be tomorrow. Yeah and particularly what happens with monetary policy is I think very important to the economy as a whole.