What Is Brewing in NHAI Contract Models

Triggering a new controversy, Union Minister Nitin Gadkari on Monday, September 9, said that the Ministry of Road, Transport and Highways has suspended a transport department official for posting a communication from the Prime Minister's Office (PMO) on National Highways Authority of India (NHAI) on social media.

Gadkari claimed that the action taken on the official was necessitated as the information leaked has led to ‘fake news’ concerning the financial status of NHAI. However, the truth is something else. The financial position of NHAI has been brought to the spotlight after reports of the brewing financial concerns within the highways authority have been disclosed by several sources from within the NHAI.

“One of our officials uploaded a picture of that (letter) on social media and a lot of fake news items were published because of that. We have suspended the official,” Gadkari was quoted as saying. However, Gadkari asserted that the authority is doing well financially and also told that it will be announcing projects worth Rs 5 lakh crore by the end of the year.

Also read: PMO Asks NHAI to Discontinue Construction of Roads

The PMO letter, written by former principal secretary Nipendra Misra, highlighted that the NHAI was “totally log jammed by an unplanned and excessive expansion of roads” and suggested it to aggressively monetise the existing road projects through either Toll-Operate-Transfer (TOT) model or Infrastructure investment trusts (InvIT).

On top of this, the Comptroller and Auditor General of India (CAG) has also flagged the NHAI’s accounting practices in its audit report for the year 2017-18. For instance, CAG pointed out that the NHAI had failed to set aside the mandatory sum (half-yearly) from its income in a reserve fund while flagging the authority’s dependence on burgeoning market borrowings. It also pointed out that NHAI has wrongly classified “assets held on behalf of government of India” under Fixed Assets, and as a result, the Fixed Assets of NHAI are overstated by Rs 2.85 lakh crore.

In order to understand the contradictions surrounding NHAI, a closer look at its financial results and its monetisation operations as well as future plans is required.

NHAI reported an outstanding debt of Rs 1.22 lakh crore in 2017-18, estimated, it rose to Rs 1.8 lakh crore in 2018-19, mainly due to massive market borrowings. On the other side, the roads ministry has recently said that NHAI is aiming to raise over Rs 75,000 crore through asset monetisation by 2024-25 through ToT and InvITs models.

Under the ToT model, the highest bidder (private players) wins the right to operate and maintain highway assets for 30 years, whereas InvITs are trusts for monetising infrastructure projects through capital markets.

Apart from InvITs model, key contracting models adopted by NHAI include ToT, Build-Operate-Transfer BOT (toll), BOT (Annuity), Engineering, Procurement and Construction (EPC) and Hybrid Annuity Model (HAM).

Also read: The Curious Connection Between IL&FS and NHAI

Under BOT (Toll), private players meets the upfront cost and expenditure on annual maintenance and recovers entire cost from toll collections whereas in BOT (annuity) model, the operators get pre-determined annuity payments by NHAI.

Under EPC model, projects are contracted for a fixed term, fixed time and fixed cost, while under HAM, private players pay 60% of the bid project cost while the NHAI pays 40% of the bid project cost in five equal instalments

According to a parliamentary submission by the roads ministry, as of July 2019, HAM mode is being used for construction of 121 National Highway (NH) projects having approximate length of 6,800 km. Whereas, during 2017-18, around 3,397 km was awarded under HAM, 3,791 km under EPC, and 209 km under BOT. Alongside, NHAI has also started calling for bids under the ToT model.

Despite the availability of several contracting models, NHAI has been posting losses (Rs 379.2 crore loss reported in 2017-18). This suggests a dearth in financial planning of NHAI when it comes to implementation of models.