The Union minister for road transport & highways, Nitin Gadkari, and the chairman of the National Highway Authority of India (NHAI) have responded with characteristic aggression to reports about the precarious financial health of the bloated NHAI. But this time, the criticism has come from the prime minister’s office (PMO)
The nub of the matter is that NHAI’s debt soared from Rs40,000 crore in 2014, when the Modi government took over, to an unsustainable Rs1.78 lakh crore in 2019 under Mr Gadkari’s watch. In August, the PMO reportedly wrote to NHAI saying the organisation has become “log-jammed with unplanned and excessive expansion of roads” and that road infrastructure has become financially unviable. It asked NHAI to discontinue construction of roads and monetise assets.
Immediately after that, NHAI’s former chairman told a television channel that NHAI’s contingent liabilities are at least twice its outstanding debt. This adds up to anywhere over Rs3 lakh crore – a number corroborated by those who do business with NHAI. A study by SBI Caps Securities (SBI Caps) corroborates this.
Mr Gadkari is unconcerned. On 9th September, at a press conference to mark 100 days of the Modi government’s second term, Mr Gadkari said, NHAI had no financial problem and would continue its high spending ways. Projects worth Rs5 lakh crore will be announced by the year-end and NHAI is targeting to build 4,500km of roads in FY19-20 against 3,900km in the previous year.
NHAI’s chairman, Nagendra Nath Sinha, speaking at an industry event, was even more dismissive about any criticism. “Either people don't understand what contingent liability is or the numbers have been over-reported.” And, yet, NHAI’s debt is expected to touch Rs2.5 lakh crore (trillion) by the end of this financial year requiring Rs25,000 crore to service interest alone.
So what happened to PMO’s letter? Doesn’t it matter? Mr Gadkari’s response has been to kill the messenger. The NHAI official, who allegedly put the letter on social media, has been suspended and Mr Gadkari has threatened ‘strict action’.
But it is hard to put the genie back in the bottle and concerns about the viability of NHAI’s many projects will continue to be discussed. The government intends to push infrastructure spending to boost consumption and reverse the decline in economic growth. Finance minister Nirmala Sitharaman has earmarked Rs100 lakh crore for infrastructure development, a chunk of which ought to go into road building.
But Mr Gadkari’s statements suggest that he doesn’t need Budgetary support, apart from the Rs90,000 crore that, he says, has already been allocated to his ministry.
Unfortunately, Mr Gadkari tends to make many contradictory statements or assertions that are not backed by commensurate outcomes. For starters, why has NHAI’s massive spending had little impact on consumption and economic growth in the past five years? Hasn’t NHAI’s debt soared because land acquisition costs have gone through the roof? Isn’t this mainly because land acquisition costs have soared?
According to a report by SBI Caps, land acquisition costs are up by an average 30% on an annualised basis since 2013. Add to this the padding of costs by various players, repeated cost escalation due to delays and lack of clearances, and you have unviable projects or non-starters which have no impact on the economy.
NHAI’s growth comes through a combination of Budgetary allocations and borrowings. Mr Gadkari, in his public speeches and press conferences, has asserted that his road projects are not unviable in spite of high land acquisition costs; at the same time, he has said that banks have now turned cautious about funding highways (they already have large exposures to corporate India, including in the failed Infrastructure Leasing & Financial Services).
“We have enough money coming from foreign pension funds, private equity funds who want to buy roads (under the toll-operate-transfer model),” he says. And, yet, NHAI’s key source of funds continues to be public sector institutions, banks and pension funds. Consider this:
The Life Insurance Corporation (LIC) has extended a 30-year loan of Rs25,000 crore to NHAI last year. NHAI expects to raise more funds from LIC this year and also tap the EPFO (Employee Provident Fund Organisation).
On 10th September, State Bank of India (SBI) chairman, Rajnish Kumar, said that the Bank is looking at lending Rs35,000 crore to NHAI through securitisation of toll receipts. Lending to NHAI, a government entity, is a safe bet for the Bank irrespective of whether or not toll collections or cash flows would cover NHAI’s costs.
An implied sovereign guarantee makes this lending risk-free (hence, NHAI enjoys high credit ratings); because, if estimates about toll receipts are wrong or fanciful, the cost will be borne by the exchequer. Mr Gadkari clearly expects a lot more from SBI. He has said, “We can raise Rs100,000 crore to Rs150,000 crore from SBI alone and from other banks also we can go for a similar arrangement.”
But not all lenders are sanguine about lending to State entities. The Maharashtra government, set for elections in two months, has provided a Rs13,000 crore guarantee for interim loans for MSRDC’s (Maharashtra State Road Development Corporation) mega-ambitious and controversial Nagpur-Mumbai Expressway, despite strong objections by the finance department. The cost of this six-lane, 710km road has soared to Rs55,335 crore; land acquisition is incomplete and it faces farmer agitations.
But Mr Gadkari is unfazed. He has promised a 1,250km Delhi-Mumbai Expressway at a stupendous Rs1 lakh crore to be completed before the next general elections. He also insists that the 4-6-8 laning of highways, which is not always necessary, but is perceived as an excuse to impose extortive tolls, will also continue without a pause.
Another issue that Mr Gadkari is oblivious to is the simmering anger among road-users. He does not respond to the outrage over the poor maintenance of tolled roads, sloppy toll collection causing long delays, the repeated collection of tolls and steady escalation in charges.
“Toll is never going to end. Even after the cost has been recovered from the projects, the toll collection will continue. NHAI getting toll income in perpetuity is a very good proposition,, he declares with total insensitivity.
Mr Gadkari has also steadfastly ignored pleas from transport unions who went on strike in 2015 on the issue of delays at toll plazas. They cited a 2012 study by Transport Corporation of India (TCI) and IIM Kolkata which said tolls cost the country Rs60,000 crore a year due to delays and stoppages.
Interestingly, transporters were not against tolling—they had offered to reimburse the government for all toll collection, including private cars, based on data provided by toll operators. It was rejected, giving rise to suspicion that policy-makers have a vested interest in continuing with the inefficient toll collection system.
No wonder, the promise of 100% ETC (electronic toll collection) at all toll plazas is still largely talk. Activist Sanjay Shirodkar says, in most places there are no dedicated lanes, awareness or discipline. He has proved that bids for toll and maintenance contracts are based on massive under-reporting of traffic data, in collusion with government organisations.
When toll rates and frequency of collection has increased, why haven’t toll collections? The SBI Caps report of August 2019 says that toll collection has grown by a modest 6% per km (from Rs55 lakh/km in FY12-13 to Rs80/km in March 2019). And, yet, the minister is gung-ho about tolling people in perpetuity!
There is a lot to be done beyond tolling. For instance, another report by TCI and IIM Kolkata in 2014-15 on “Operational Efficiency of Freight Transportation by Road in India” has estimated the cost of delays (due to check posts, etc) at $6.6 billion per year and the cost of additional fuel consumption due to delays was estimated at US$14.7 billion per year.
This was to be addressed by the E-way bills under the Goods and Services Tax (GST). But Mr Shirodkar says that this only addresses the tax issue; other stoppages causing delays remain unaddressed.
Addressing this is also a part of Mr Gadkari’s remit, but he has preferred the easy option of increasing fines for all traffic offences to such ridiculous levels that it has led to a harsh backlash and even violence.
Significantly, the Gujarat government has slashed fines for compoundable offences, announced by the Centre, by a sharp 90% and the Maharashtra government, which has not notified the new fines, also seems headed that way.
Since both states have strong Bharatiya Janata Party (BJP)-led governments, one wonders whether this is just a self-serving pre-election decision by the two states or an indicator of political differences at the top.
No large infrastructure project in India is complete without massive cost overruns. Often, cost escalation is announced even before construction commences and final costs are sometimes a multiple of the original estimate.
This is often due to the collusive nexus between project operators, government organisations and politicians. With banks and lenders insisting on state guarantees, the eventual cost of unviable projects or losses will be borne by the people.
In the 1990s, the United Progressive Alliance (UPA) government, led by the Congress, permitted high-cost power projects with guaranteed returns. We, as consumers, continue to pay very high tariffs two decades later, when power generation costs have fallen drastically.
Unless Mr Gadkari’s bravado about pressing ahead with unviable projects is checked, future generations will pay the price for expensive roads and freight transportation.
The wired telecom sector has created significant interest over the past few weeks with the entry of Reliance Jio offering 100Mbps to 1GB speed starting from Rs699 to Rs8499 per month. However, the plans offered by Jio are unlikely to drive a significant churn in the market, says CRISIL.
In a research note, the ratings agency says, "The lack of pricing aggression and non-attractive bundled pricing would result in limited disruption in the underpenetrated wired broadband market. Further, higher non-refundable deposit fee of Rs2,500 and additional cost for premium content would also dampen prospects."
JioFiber’s base plan starts at 100Mbps for 100 GB data limit (plus 50 GB extra for six months). The base plan of most other wired broadband providers starts at 50Mbps for almost the same amount of data, if not more.
While Jio’s pricing per GB is approximately Rs4 for the base plan, other operators are also in a similar range. Government owned BSNL's cost is much lower at Rs2 per GB. Among premium plans, JioFiber’s price per GB is about Rs1.2-Rs1.6, again in line with competitors.
JioFiber has also introduced some differentiated offerings including speeds of 1 Gbps, television set on annual subscription of higher-end plans, and other value-added services such as virtual reality sets, home security, content sharing, and device security.
However, according to CRISIL, these niche services are not the primary hook for customers at present, for ‘smart homes’ are yet to capture public imagination and wallets. Moreover, it says, "current speeds of 50-200Mbps offered easily fulfil the data needs of households. Giga-speeds would find applications mostly in internet of things (IoT) use cases, the uptake of which, we believe, is still some time away."
India currently has 18.4 million broadband subscribers as of March 2019 as per the Telecom Regulatory Authority of India (TRAI)’s report. With a mere seven connections per hundred households, India’s wired broadband market is highly underpenetrated. In comparison, developed nations such as the United States, the UK, France, and Japan have 30-50% penetration levels.
The broadband subscriber base in India has been expanding at a snail’s pace over past five years due to relatively high tariffs in wired broadband compared with wireless and lack of focus among telcos in the wired broadband space.
In contrast, India has high television penetration of about 65%, with around 190 million households owning cable or direct-to-home (DTH) connections.
Of this, about 167 million households are without wired broadband connections (assuming a household with wired broadband will also own television). These households could have been a ready target market had broadband services been bundled with TV subscription at competitive rates, CRISIL feels.
It says, "With the new entrant’s pricing giving no indication of bundling TV cable services, this market would largely remain untapped for now, narrowing the possibility of a significant uptake in broadband penetration. However, the acquisition of Hathway and Den networks gives JioFiber access to 14 million cable TV homes to push its broadband offerings."
While there would be no major churn in broadband segment, the ratings agency sees the average revenue per user declining marginally over the next few months as other players try to match JioFiber's pricing to protect their market share.
"We believe consolidation in the sector is also some time away. Further, emerging developments in terms of pricing in the television distribution space will remain a monitorable. So intense attrition is unlikely in the road ahead," CRISIL concluded.
In a relief to commuters, the Punjab and Haryana High Court has asked Rapid Metro Rail Gurgaon Ltd (RMGL) and Rapid Metrorail Gurgaon South Ltd (RMSGL), the two special purpose vehicles (SPVs) of scam-hit Infrastructure Leasing & Financial Services (IL&FS) to continue to operate and manage the Rapid Metro Rail on both lines till 17 September 2019. However, the cost will end up being borne by the Haryana Urban Development Authority (HUDA).
A bench comprising Justices Rakesh Kumar Jain and Arun Kumar Tyagi said, "Till the next date of hearing 17th September, the respondent shall operate and manage the Rapid Metro Rail at Gurgaon (now Gurugram) on both the lines but subject to reimbursement of the insurance and operation and maintenance cost by the petitioners in this period." The court will further hearing into the matter on 17th September.
The High Court decision is crucial in connection with the operational continuity of the Gurgaon Metro, the country's first fully privately built rapid rail system. Further, IL&FS, which built it is now facing bankruptcy proceedings before the NCLAT, thus putting the Gurgaon Rapid Metro service at risk of closure.
The HC order came after the expiry of 90-day termination notice served by RMGL and RMGSL, the two SPVs floated by IL&FS for the rail project. The notice was served on HUDA on 7th June. Gurgaon Metro is a crucial public utility carrying nearly 60,000 passengers every day and it is commonly referred as 'Millennium City's daily commute lifeline.
Last week, HUDA had moved the High Court challenging the validity of termination notice. The development authority had sought courts directions in connection with the continuity of public utility by these two SPVs operating the metro link.
The High Court observed that the dispute between the parties may be resolved by negotiation for which they both would require some time and, therefore, the hearing of this case was deferred to 17th September. The order of stay granted last week is also extended till midnight of 17th September.
Chetan Mittal, counsel for Haryana Mass Rapid Transport Corp Ltd (HMRTCL) told the court that Justice DK Jain, appointed by National Company Law Appellate Tribunal (NCLAT) to oversee the processes, had given the nod to transfer assets, handing over the possession and to negotiate for operation and maintenance.
This is pursuant to the NCLAT order of 8 August 2019 where - RMGL and RMGSL - being red entities were required to seek prior approval from Justice (retd) Jain, former Supreme Court judge, mandated to oversee the IL&FS resolution process, before selling, transferring, encumbering, alienating, dealing with or creating any third party right, title or interest on any movable or immovable assets.
Justice Jain, in the order, has also said that HUDA shall be free to engage the services of RMGL at mutually discussed charges to run the Metro Link till such time appropriate or alternate arrangements are made to run the same, a report from IANS says.
Mr Mittal told the HC that the contract between RMGSL and HMRTCL stood terminated from both the sides. "Some disputes relating to transfer of assets would take some time. But they are ready to go ahead, whatever be the operational costs as its continuation is in larger public interest," he said.
The project, he said, has earned Rs4 crore profit during three-month period. The total earnings were about Rs18 crore, while the cost of operations were around Rs14 crore. Besides they were in touch with Delhi Metro Rail Project and other agencies.
In the last hearing, Mr Mittal had said the HMRTCL and the respondent had entered into an agreement, whereby the concessionaire was required to develop, operate and maintain metro link from Delhi Metro Sikandarpur Station on MG Road to Sector 56, Gurugram.
As pointed out by Moneylife, the spanking world-class Rapid Metro, which became operational in Gurgaon (now Gurugram) in 2013, had certainly added lustre to the modern township built by DLF. But the project was based entirely on fraudulent and fabricated ridership claims, to get government sanctions, right of way for land use and other benefits. The metro project was conceived by DLF, the realty giant, and mid-wifed by the scandal-hit IL&FS. (Read: IL&FS Scam: Gurgaon’s Rapid Metro Was Based on Entirely Fraudulent Numbers)