A lot can happen in a week and the stock market reflected all of it. Indices dived in deep depression at the government’s failure to recognise the economic and financial distress, compounded by harassment over tax systems.
Finance minister (FM) Nirmala Sitharaman’s mini Budget, tax rollbacks, liquidity for banks and housing finance companies, along with an assurance to release tax refunds and reduce harassment, led to a sudden surge in optimism.
However, by 27th August, the optimism was quickly eroded after the government took away Rs1.76 lakh crore of Reserve Bank of India (RBI) reserves, especially when Ms Sitharaman said, “I cannot comment on what the funds transferred by RBI will be used for.”
After all, there is a massive shortfall in government tax revenues (coincidence or not, estimated at around Rs170,000 crore) and a hidden fiscal deficit estimated by experts at Rs176,000 crore. Then there are massive holes outside Central government finances too, such as Food Corporation of India, power distribution companies, and the vast debt and contingent liabilities accumulated by the National Highway Authority of India (NHAI).
Almost exactly a year after the giant Infrastructure Leasing & Financial Services (IL&FS) had began to default on its debt of nearly Rs100,000 crore, the FM, Ms Sitharaman has announced plans for a new organisation “to provide credit enhancement for infrastructure and housing projects with an aim to enhance fund flows towards such projects.”
Remember, this has been planned even as the failed IL&FS is nowhere near resolution. Technically, a few of the 347 companies (the existence of half of these was unknown to all government regulators and auditors until after the board was sacked) have been shut down; but not a single sale has been fully completed as yet.
Meanwhile, NHAI’s gigantic debt, contingent liabilities, stalled projects and web of litigation across the country, are turning into the biggest roadblock to infrastructure development. Union minister Nitin Gadkari has ignored this for five years, even as he criss-crossed the country announcing mega projects with massive outlays. Reports that the prime minister’s office (PMO) has rapped the ministry for extensive and ‘reckless’ highway expansion, finally, led to a much-needed public discussion last week.
NHAI has reportedly been asked to discontinue construction of roads and monetise assets; this has happened only after NHAI’s debt soared from Rs40,000 crore in 2014 to an unsustainable Rs1.78 lakh crore in 2019 under Mr Gadkari’s watch.
The rating agency, ICRA Ltd, attributes this to the increased cost of land acquisition and has reaffirmed NHAI’s high ratings confident that “support from the Government of India (both financially and operationally) would be crucial for maintaining the credit profile of NHAI.” But ICRA’s rating rationale of May 2019 is oblivious about the extent of NHAI’s contingent liabilities. The rating agency has a number of Rs63,000 crore, which it considers ‘sizeable’, when the real figure may be five times larger!
In an interview to CNBC-TV, Brijeshwar Singh, former NHAI chairman, said that the contingent liability could be in excess of Rs3 lakh crore! According to an industry veteran, “Most highway companies are listed and rated. All of them have claims against NHAI in their books. Even if you discount these claims to 70%, the contingent liability would add up to over Rs3 lakh crore.”
This source tells me that this huge liability is because NHAI is not in the habit of releasing payments to contractors and concessionaires easily. It has thousands of disputes under arbitration, conciliation and litigation pending with most major contractors across India.
Way back in 2014, a top audit firm had pointed out that NHAI is one of the biggest litigants in Indian courts. At that time, it had over 5,000 cases pending in various courts and another 200 in the Supreme Court. The number may have easily doubled.
Most disputes are over cost overruns, usually caused by long delays in land acquisition and obtaining various approvals and clearances which, often, turned projects unviable even before construction commenced.
This has made many companies wary about dealing with NHAI; some private operators have found ways to ensure that costs are inflated or their contracts include dubious clauses, that allow them to even change the scope of the projects on ‘mutually accepted basis’. Eventually, India pays the price in terms of high infrastructure costs.
Disputes with NHAI are also a hurdle in the resolution of IL&FS. The government is understood to have set up a committee to look into these issues. While the IL&FS group debt is nearly Rs100,000 crore, the previous management had claimed that Rs17,000 crore was due from NHAI.
IL&FS’s new management is also struggling to reconcile the vast gap between the erstwhile management’s claims against NHAI and MoRTH (ministry of road transport and highways) and arrive at a smaller, but realistic estimate.
I learn that, unless IL&FS can resolve the legal tangles with NHAI, it will struggle to find buyers for several of the road projects. This means that NHAI, a government entity, is now a stumbling block to resolution.
With funds having dried up, the infrastructure industry is worried about NHAI being able to generate enough cash to service interest payments without constant government support. Its participation in the over-ambitious Bharatmala Pariyojana project, involving a phase-1 project outlay of Rs5.35 lakh crore, may also be canned. Of this, 19,800km of roads were to be built by the public sector giant.
NHAI, set up to implement the golden quadrilateral project under Atal Bihari Vajpayee government, has steadily become a dysfunctional and corrupt organisation. Part of the problem may also be that NHAI’s powers have been steadily diluted, affecting decision-making. Failure to fulfil its responsibility of ensuring timely land acquisition, shifting of utilities, environment and forest clearances, along with flawed processes led to disputes that ended up in a legal quagmire.
In 2015, Union minister Nitin Gadkari set up a committee for revamping NHAI. The committee’s main recommendations were to empower the board, change the method of awarding contracts (moving away from the least-cost model to the average-bid principle using standard deviation), find ways to revive stalled projects, set up a dispute resolution board to resolve issues faster, and streamline its project evaluation and project financing practices. A simultaneous study was commissioned on setting up an Expressway Development Board of India and for taking up construction work abroad.
None of the recommendations of this committee has seen the light of day. That Mr Gadkari was blissfully unaware of the looming crisis is evident from NHAI’s spending spree and spiralling debt. Mr Gadkari has continued to announce new projects that were unviable from the word go due to high land acquisition costs.
In 2017, speaking at an event, he said the government was planning Rs8 lakh crore investment in 30 rural connectivity projects of which five were set to begin. “I have no problem of money… if banks take too much time in granting approvals, we will offer them as EPC (engineering-procurement-construction mode) projects, he said.
He also announced plans to build an additional lane on national highways every three years entailing an investment of Rs80,000 crore to cater to ‘ever increasing’ traffic load.
Mr Gadkari was making these statements even when it was clear that bank funds for infrastructure were drying up; we now know that IL&FS was groaning under a massive debt taken for unviable projects and already resorting to financial jugglery.
The minister had no such worries. He said NHAI would make an IPO (initial public offering) to raise funds and bragged that it could raise Rs10 lakh crore. Although there was no IPO, in July this year, LIC was asked to provide Rs30,000 crore to NHAI by subscribing to bonds. Meanwhile, in the same month, Mr Gadkari told the Rajya Sabha that he planned to create a separate finance arm for the NHAI for which he would seek the finance ministry’s permission.
In fact, this was part of the recommendations made by a committee in February 2016; but, surely, that ship had sailed after the IL&FS crisis. Mr Gadkari neither knew nor cared. He hasn’t had a word to say on the entire IL&FS imbroglio, although his ministry worked closely with the cabal that drove that hydra-headed giant monster into a debt trap.
What is the solution to this mammoth financial muddle at NHAI? One silver lining is that the PMO seems aware of this problem with principal secretary Nipendra Mishra holding multiple meetings to sort out NHAI’s issues -- something that ought to have been Mr Gadkari’s responsibility.
NHAI is running out of options. Hopefully, the deep crisis, and the PM’s dreams of infrastructure development, will finally force a real clean-up. The question is: Will the PMO be able to find a solution that does not involve taxing the people further?