Road Sector Opportunities- NIP and BMP

In the last article, we read about the infra schemes operational in our country, including the Bharatmala Pariyojna (BMP). Quick recap: The Bharatmala scheme is the flagship road building program which has subsumed the balance work of NHDP, thereby announcing massive development of total 66,000 kms over next decade. You must have even heard about the Govt’s planned investment of Rs. 100 lakh crore to make India a $5trn economy. In response to that, a National Infra Pipeline has been created envisaging investments worth ~Rs. 111 lakh crore in infrastructure sector, and if implemented in the right manner, it has the potential of being a game changer. There is no denial that, prima facie, the planned outlay looks too large and too ambitious to be implemented, however, in a vast country like India, this has been and shall always be the case. We announce schemes worth Rs. 100 and end up doing Rs. 50. However, in our case, what is worth noticing is that there is atleast an intent of spending huge sums in the sector. Now, it is upto us, whether we want to focus on why we did not do the full Rs. 100 or be happy with the fact that we atleast did Rs 50. 

What is National Infrastructure Pipeline (NIP) and where does it fit in with BMP?

Introduction to NIP: The government has created a task force to identify potential investments in infrastructure sector and to create a Project Pipeline. The task force has identified projects worth ~Rs 111 lakh crore, and a National Infrastructure Pipeline (NIP) has been created to facilitate this capital outlay in a feasible and phased manner by identifying and keeping ready a pipeline of economically and strategically important projects (+ 6,500 projects- Link). A separate agency will also be created for project monitoring. The government expects to frontload many projects to start execution on them. Major thrust shall be on power, roads, railways and urban development (contributing to ~72% of total pipeline).

NIP’s financing angle still remains a little blurred: Although the government has announced that NIP will see support from the centre and states to the extent of ~40% each, and the rest 20% shall come from private sector (expected to increase it to 30% by 2025), not much details on financing of this massive opportunity is shared. The source of finance is not crystal clear at this stage, making this outlay look a bit ambiguous. Going by the definition of infrastructure used in one of the budget speeches, the government’s annual spend hasn’t been more than ~Rs 6 lakh crore, and given the reluctance of private sector in pitching in, achieving an annual run-rate of Rs. 20 Lakh Crore looks challenging, unless the government charts out clear sources of funding, just like it did for BMP.

Lot of structural reforms announced: The government has announced various reforms in the sector, which includes improving project preparedness, enhancing execution capacity of private sector participants, strengthening of bonds market for funding, facilitating asset monetization, bringing out reforms in PPP agreements, better enforcement of contracts, creation of agencies for robust monitoring, scientific pricing of assets use, easing dispute resolution, and introducing steps to solve challenges in long-term financing landscape. It also aims to create a data room and an online dashboard for better dissemination of information, which was missing till now. Annual Global Investor conferences specific to the infrastructure sector shall be held to gather interest/shortcomings from various stakeholders, and also an annual supplementary report shall be published with a list of projects to keep public at large appraised.

Roads in NIP: The Road sector spends are expected to be Rs 20.3 lakh crore of the total Rs. 111 lakh crore pie. And to update on the status- 34% of the road projects are already under implementation, 27% are under development (DPR ready), 36% under conceptualisation, and rest are uncategorized now. Centre will support 25% of the total spending, while state governments will pitch in 36% of spends, while the rest is to be garnered from private sector (which looks difficult- given the private sector participation till now). 

BMP and NIP; how does both of them fit in? NIP is an all-inclusive investment target plan of govt to spend ~Rs111 lakh crore, and thus, the roads allocation of Rs 20.3 lakh crore in this will be achieved by BMP. Simple calculations will help us achieve this number. So, historical analysis suggests that for construction of a four lane road kilometre, authorities spend ~Rs 20 crore on civil cost (this varies based on the terrain, mode of award, competitive intensity, etc- but yes it’s an approximation) and another ~Rs 6 crore / km on land acquisition (again it’s an average). So basically, it requires ~Rs 26 crore to be spent on project cost and land acquisition to construct a single kilometre of four lane road. Now multiplying this basic cost with the intended Bharatmala Program of 66,000 kms, we get an expected outlay of ~Rs 17 lakh crore, and the rest can be attributed to one large component, which over the last decade has remained largely hidden but gained importance recently with the burgeoning debt of NHAI - Funding cost. Apart from it, some differences might pertain to escalations.

However, there is one disconnect, which is still unanswered. The BMP (~Rs17-18 lakh crore) is a whole sole NHAI program implemented by MoRTH (centre), and on the other hand, share of roads in NIP (Rs 20.3 lakh crore) focuses on all India investment (including 40% from states and another 40% from Centre). So, while NIP says Rs 8 lakh crore will be spent by centre, we actually have a calculated expected outlay of Rs 17 lakh crore to be done by NHAI alone. Definitely, this does not add up. Maybe, NIP includes just the BMP-I, or who knows, if BMP -II includes spends by state governments too!

Quick notes from Budget FY 2020-21 (Mostly numbers down there)

• MoRTH including NHAI got Gross Budgetary Support (GBS) of ~Rs. 82,000 crore for capital expenditure. The Indian budget size is ~Rs. 30 lakh crore of which capital expenditure is Rs. 4.12 lakh crore. Thus, roads enjoy dominant share at 2.7% of total budget and 20% of total budgeted capital expenditure. Road sector also got IEBR of Rs. 65,000 crore out of total IEBR of Rs. 7 lakh crore, which is a share of 9.2%. Thus, summing up FY21 capital outlay on roads is budgeted at Rs. 1.47 lakh crore.
• MoRTH allocation is Rs. 39,500 crore, while NHAI’s estimated expenditure is Rs. 1.08 lakh crore (down 4% YoY). NHAI borrowing targets – reduced by 13% to Rs65,000 crore (from PY allocation of Rs75,000 crore- maybe because of all the fuss going around on its borrowings!). The expected TOT proceeds are Rs. 10,250 crore (looks difficult- given not single bundle has gone out yet).
• Cess on petrol & diesel is Rs 8/ltr(same as last year) which is deposited in the Central Road Fund (CRF). Total Cess collection for FY21 expected to be Rs 125,600 crore vis a vis Rs 118,000 crore, up +6.4%. This cess has other uses as well apart from allocation to MoRTH & NHAI for road development.

Other reforms that were announced in Budget

• 100% Tax exemption to foreign Sovereign Wealth Funds (SWFs) on interest/dividend or Capital Gains, on investments made in priority sectors (including infrastructure) by March 2024 (for a minimum lock in 3 yrs). This is huge and will incentivize monetisation and asset deals.
• Rs 22,000 crore support provided to IIFCL & NIIF, which will be leveraged and shall provide equity and long-term financing for NIP.
• By FY2024- to monetize atleast 12 bundles of HWs of 6000kms. (Looks difficult- as this means 1500 kms every year suggesting monetisation of ~Rs 10-15,000 crore a year)
• Focus on accelerated development of HWs (4500km of access controlled HWs, 9000km of Eco corridors, 2000km of coastal roads and strategic HWs each)
• Delhi Mumbai and two other greenfield economic corridors to be completed by FY23. Work on Chennai-Bengaluru started too.
• Focus on FASTag mechanism which encourages towards greater commercialization of highways so that NHAI can raise more resources. 

Given the intent of government to turn India into a $5trn economy, and with ambitious infrastructure plans of Rs. 111 Lakh Crore, it is clear that the intent for infra development is very much there. However, there are far more things in the checklist (to be discussed later), which need to be ensured if a smooth implementation is warranted.

Please note that above views are personal and not of organization’s.