The Missing Milestone

Take me home, country roads... the 1971 evergreen John Denver song can, with a little twist, become central government’s anthem for FY2023. The NDA government is, after all, betting on highways to take it home—which, in its case, means frenetic infrastructure building to steer the economy out of trouble and get growth going.

Not only is roads and highways minister Nitin Gadkari looking to break all highway building records—FY2023 target is 25,000 kms, while the best till date is 13,327 kms, in FY2021—central government is also hoping that all-time-high allocations to ministry of roads and highways in Union Budget FY2023 can push private sector spending and create demand.

But data shows going may get tough for Nitin Gadkari’s ministry. The pace of highway construction dipped 21.5% to 10,460 kms in FY2022 as against 13,327 kms in FY2021 despite record award of contracts—12,731 kms in FY2022 vs 10,964 kms in FY2021. The FY2022 target was 12,000 kms. Experts and industry observers blame delays in clearances, sky-rocketing commodity prices, localised lockdowns due to Covid-19 and delays in pre-development works in projects awarded in FY2021.

Sea Change

The change in tempo is in sharp contrast with January last year when the ministry and the National Highways Authority of India were in a celebratory mood as road construction crossed 70 kms a day. To commemorate the record, Gadkari organised a get-together at his residence on March 31 last year where he listed efforts of past seven years to re-start stalled projects worth ₹3,00,000 crore, remove policy hurdles and handhold contractors. He jokingly said he would check if 36 kms a day (FY2021 average) was a world record and try to get it registered in Guinness Book of World Records. He set a target of 40 kms a day for FY2022.

The ministry’s achievements did not go unnoticed. Encouraged by efforts put in by the highway sector despite Covid-19 disruptions, and to revive growth, Centre opted for capital expenditure-led growth in Budget FY2022 by increasing allocation for the highway ministry by 32% to ₹1,18,101 crore, of which ₹1,08,230 crore was for capital expenditure, the highest ever.

“More than 13,000 km length of roads, at a cost of ₹3.3 lakh crore, has already been awarded under the ₹5.35 lakh crore Bharatmala Pariyojana, of which 3,800 kms have been constructed. By March 2022, we would award another 8,500 kms and complete an additional 11,000 kms of national highway corridors,” Sitharaman said in her Budget speech. Bharatmala is an ambitious plan started in October 2017 to build, among other important infrastructure, a national highway network of 34,800 kms by December 2022.

At this juncture, the targets look too ambitious.

Hitting a roadblock

In FY2022, highway building hit a hurdle, with award of contracts falling below FY2021 levels, only to gain momentum in March. Monthly construction data accessed by Fortune India shows highway construction was down in nine out of 12 months of FY2022 compared with FY2021. The gap was the widest in January this year, when 499 kms were constructed compared with 1,929 kms in January 2021. In February and March of FY22, however, activity picked up with 1,361 kms and 2,412 kms, respectively (see Monthly Construction).

The slow pace of construction is now reflecting in lacklustre achievements under Centre’s flagship Bharatmala project whose Phase-I was to run from 2017 to 2022. The project is in its terminal year and only 8,134 kms roads, less than 25% the targeted 34,800 kms, have been constructed. “Out of 34,800 km length envisaged for development under Bharatmala Pariyojana Phase-I in the country, national highway projects comprising 20,411 kms, at a cost of ₹6,18,686 crore, have been awarded and 8,134 kms of project length has been constructed till now,” Nitin Gadkari told Parliament on March 31 in response to a query on the status of the project. This means 26,666 kms roads will have to be completed till December at roughly 109 kms per day. That looks well nigh impossible.

The Economic Survey tabled in Parliament on January 31 this year also pointed out the sluggish pace of highway construction. It said 3,824 kms roads were built in April–September (first half of FY2022). This translates into 20.89 kms per day, way less than 36 kms per day constructed in FY2021.

This is despite the fact that utilisation of funds allotted for capital expenditure went up during the period. Finance ministry data reveals that during FY2022, capital expenditure by the ministry was ₹1,13,311 crore, up 29.6% from ₹87,402 crore FY2021.

So, what’s behind slowing down of highway construction? Motilal Oswal’s lead analyst, Alok Deora, who tracks infrastructure companies, points at delay in grant of appointed date, even as he says there are no delays in financial closure of road projects. Appointed date is the official date when a developer starts construction and is supposed to almost coincide with financial closure. NHAI grants the date after acquiring 80% land and removal of other utilities along project alignment. “Financial closure is not an issue as financial institutions are sufficiently funding projects. Typically, a developer should get appointed date within two months of being awarded the project. It is taking four-five months,” says Deora.

Rising input costs are also taking a toll. “Prices of steel and cement have gone up. Companies may also have gone a little slow on execution,” he says.

Another factor is ripple effect of delays in projects that were awarded in FY2021 and inadequate investment by government, says V.R. Neelakantan, partner, Shardul Amarchand Mangaldas and Co. “Onset of Covid-19 would have impacted pre-development work like financial closure, licensing tie ups, etc, in projects awarded in FY2021. On-site impact during subsequent waves and cascading impact of delays in pre-development work may have impacted construction in FY2022,” Neelakantan says, pointing out that the allocation for highways was inadequate last year. He is hoping for a pick-up in construction on account of higher allocation this year. In revised FY2022 estimates, government has enhanced the allocation for the transport ministry from ₹1,18,101 crore to ₹1,31,149 lakh crore. The FY2023 allocation is ₹1,99,108 crore.

Another infrastructure policy expert says that given the enormity of these projects, which require front-loading of expenses on land acquisition, kms built may not be visible immediately. According to the ministry’s annual report for FY2022, road projects exceeding 64,000 kms, costing more than ₹11 lakh crore, are under progress.

“When you expand a highway or build an additional stretch, initially, a lot of money goes into acquiring land. It does not lead to addition in kms, which comes at the end. So, deployment of resources is not strictly proportional to kms added,” says Arindam Guha, leader, government and public services, Deloitte India. “Secondly, I think the ministry is also constructing ancillary infrastructure and evacuation projects, apart from the roads, which is taking time,” says Guha.

Industry body National Highways Builders Federation (NHBF) blames lockdowns. “Localised lockdowns affected pace of construction. Since road projects spill from one state to another, there has been a considerable impact due to different rules in different states,” says P.C. Grover, director general, NHBF. He is now hoping for unhindered construction with lifting of Covid-19 curbs.

Award of contracts, too, remained subdued in FY2022, barring March, which improved the yearly average. The total FY2022 number, at 12,731 kms, surpassed the 10,964 kms for FY2021 only due to finalisation of construction contracts for 5,113 kms in March alone.

The ministry defends the performance. “FY2022 was a year of consolidating gains that have accrued from major policy decisions taken in previous six years, and aspiring to maintain the momentum of the historically highest pace of road development (37 kms/day) achieved last year. Monitoring of ongoing projects was intensified and critical interventions were made to resolve pending issues and bottlenecks,” says the ministry’s annual report released in December. “National highways of 5,835 kms have been constructed in first nine months of FY2022. The ministry has sensitised project implementing agencies to make extra efforts in view of Covid-19 and maximise achievement of targets for FY2022,” it adds.

Key Schemes at Stake

The slowing pace of highway construction will compromise key projects such as the Bharatmala Pariyojana that envisages setting up a network of economic corridors, inter-corridor feeders, border roads, port connectivity projects, expressways and subsuming 10,000 kms of the balance work under the National Highway Development Programme (NHDP). It will also reduce the multiplier effect of higher capex on economy. NHDP is a legacy of former prime minister Atal Bihari Vajpayee under which the flagship Golden Quadrilateral project, connecting the four metro cities, was built.

The sub-schemes under Bharatmala project have also lagged in current financial year as well as over last five years. Under phase-I of Bharatmala, as against the target of 9,000 kms economic corridors, only 1,157 kms had been completed till December 2021, according to data from ministry of road transport and highways. Similarly, out of 6,000 kms inter-corridor feeder route, only 562 kms could be constructed till December 2021. A minuscule 52 kms port connectivity projects have been constructed in last five years as against the target of 2,000 kms. Expressways, too, lag, with 449 kms built till December last year as against the target of 800 kms during phase-I, according to ministry data. This calls for a serious review of Bharatmala project implementation. It may, however, be noted that construction of the ₹98,300 crore greenfield Delhi-Mumbai expressway is progressing well. The project is expected to meet its deadline of end of current financial year.

What Next

Government does not seem to have given up on highways as a sector that can push other parts of the economy into a high growth phase. That explains the ambitious target and allocations for FY2023. “Master plan for expressways will be formulated in FY2023 to facilitate faster movement of people and goods. The national highway network will be expanded by 25,000 kms in FY2023. ₹20,000 crore will be mobilised through innovative ways of financing to complement public resources,” the finance minister said in her Budget speech. A total of ₹1,87,744 crore out of the ₹1,99,108 crore budget allocated for ministry of roads and highways is for capital expenditure.

Experts, meanwhile, feel that construction may go up but companies may see their profit margins coming under pressure. “The construction is likely to go up in the fourth quarter. But margins for highway developers may come under more pressure owing to rising input costs. It was quite visible in Q3 numbers too,” says Deora.

From the macro perspective, with one-fourth of the budgeted FY2023 capital expenditure allocated to it, the highway sector is the fulcrum of the planned mega infrastructure expenditure of ₹7.5 lakh crore to propel the economy into the high growth path. The target for current financial year is unprecedented, requiring government to fast-track award of contracts, look beyond the traditional engineering procurement and contract systems and rope in more private sector companies on a public-private partnership basis. Data for first two months of current fiscal reveals the ministry may need to pull up its socks. Construction in April and May stands at 1,307 kms, compared with 1,470 kms in same months of FY2022. Contracts for just 496 kms have been awarded up to May compared with 663 kms in same period last year.

The onus of economic revival through infrastructure building rests on Nitin Gadkari’s ministry. The spotlight is on.