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September 04, 2017

Roads: New funding mechanisms to support project execution

Project execution by National Highways Authority of India (NHAI) is expected to reach 3,010 km in 2017-18 and over 3,500 km in the next coming fiscal, from 2,625 km in 2016-17. The pace of execution will involve sizeable increase in investments. In fact, over the next five years, overall investment is expected to rise 2.8 times. With public investment constituting a considerable 57% of the total investment in national highways, the funding needs of the NHAI - the key implementing agency - is set to rise. While cess used to be NHAI’s biggest source of funding, the model is undergoing a change, with NHAI supporting project execution through
higher external borrowing.

In 2016-17, while NHAI had budgeted Rs 121 billion of cess funds, it is estimated to have utilised only ~Rs 75 billion. The agency instead raised funds from institutional investors, such as Life Insurance Corporation (LIC; Rs 85 billion) and Employees' Provident Fund Organisation (EPFO; Rs 100 billion). As NHAI has the ability to raise funds from other sources, the remaining portion of the budgetary support was diverted to non-NHAI road projects. LIC agreed in-principle to subscribe to NHAI's taxable bonds to the tune of Rs 250 billion over the next 3-4 years. NHAI also raised Rs 50 billion on the Bombay Stock Exchange bond platform. In 2017-18, it has raised funds totalling Rs 30 billion on the London Stock Exchange as well, in the form of masala bonds. 

Over next five years, NHAI’s funding through cess is expected to remain low at ~18% compared to ~35% in the previous corresponding period. In this scenario, the ability of NHAI to consistently raise debt through external sources is a key monitorable. Toll-operate-transfer is a new public-private partnership model for maintenance that NHAI is pursuing, and which is expected to provide the agency Rs 400 billion over the next 2-3 years. However, reforms such as the Goods and
Services Tax and implementation of the dedicated freight corridor may significantly impact traffic composition.

Private participation in national highways is expected at 40-42% over the next two years, and 43% over a five-year period. To support this level of private participation, lending support to the sector is required to grow ~14% CAGR over the next five years, which is lower than the expected growth in bank lending to the sector. This shortfall will have to be funded through avenues such as National Infrastructure Investment Fund.