The Modi govt. had announced with much fanfare that it will build over 83,000 kms of National Highways in five years ending 2022. The cost of this building spree was estimated at a staggering Rs.7 lakh crore. This included the Bharat Mala project comprising about 34,000 kms of roads that would fill key infrastructure gaps. It was also claimed that this massive construction boom will send job creation rocketing upwards and pump in much needed money into rural areas.
But a look at the highway building data shows that this ambitious programme has run into trouble. Construction work has slowed down, achieved road completion is dipping and stood at just 51% of the target in 2017-18, credit flow to this sector has declined and companies that were awarded lucrative contracts are in deep debt.
While the relatively modest target set in the first year showed 70% achievement, this dipped dramatically to about 55% in the next two years and then further to 51% last year, according to statements in the Rajya Sabha in response to questions by members.
While official statements explain this by saying that land disputes, environmental clearances etc. are taking up time causing project over-runs and cost escalation (all of which is true), the real reason is that the public-private-partnership (PPP) model favoured by Nitin Gadkari, minister of road transport and highways, has yet again come a cropper.
A new financing model was adopted that supposedly would reduce the risk that private investors face in infrastructure projects. This was the Hybrid Annuity Model or HAM under which govt. funds 40% of the project cost while the company that wins the contract funds the rest through a combination of equity and debt. The company puts in just 12% of the cost and borrows the rest 48% from banks. Once the project is finished, the govt. pays the balance 60% to the company in 6-mothly annuities by collecting tolls, along with a 10% interest. It was a super-sweet deal for the private investors by any measure.
What happened was that the proposal attracted a bevy of companies that reportedly were ill suited for the enormous debt they took on. According to a Bloomberg estimate, of the 55 billion rupees of incomplete projects late last year, about four-fifths were backed by such “financially weak companies”. This year, of 104 projects awarded under HAM, 56 are facing financial closure issues from banks, according to analysts at Nomura Holdings Inc.
So, with all the deal sweetening by Modi-Gadkari, we are back to square one: infrastructure projects languishing because of bad loans. That’s the scenario that was sought to be avoided but HAM resulted in the same mess, primarily because it was ill-conceived and resting on the cock-eyed premise that govt. investment needs to be replaced by private investment.
But there is more. The companies carrying the big debt burden need more loans to get out of the mess. Meanwhile the Indian banking sector is afflicted with dangerously high levels (and rising) of NPAs or bad loans. So, they are reluctant to lend more to already cracking debtor companies. This boom and bust (see chart below) is a familiar story. Modi-Gadkari have led the country back into this trap.
It is not that the govt. was caught unawares. As far back as 2016, the Parliament Standing Committee on Transport had observed that several of the long-term loans disbursed for the road sector are turning into non-performing assets (NPAs) and that project bids are often made without proper study, and projects are awarded in a hurry. Even the latest report of the Standing Committee submitted in March 2018 says that it “notes with dismay that even after various efforts by the Government, large number of projects are delayed”.
But Modi, Gadkari and their colleagues are carrying on blithely, supremely indifferent to the chaos being caused by their short-sighted policies.