ISLAMABAD: The National Highways Authority (NHA) has been in severe financial distress with accumulated losses of Rs1.5 trillion since fiscal year 2014 and an outstanding loan portfolio of Rs3.1 trillion, which hinders the entity’s ability to invest in operations and upkeep of roads.
This has been noted in the State Bank of Pakistan (SBP) annual report 2023-24, chapter title, “Reforming State-owned Enterprises in Pakistan” which further stated that NHA often features as one of the highest loss-making entities in the state-owned enterprises (SOE) space.
The entity is largely financed by cash development loans (CDLs) irrespective of commercial viability of projects. These loss-making projects, on the behest of the state, are often necessary for social or developmental reasons, and fall outside the parameter of commercial considerations.
As part of the repayment mechanism of CDLs, the federal government makes compulsory deductions at source from NHA’s budgetary allocations which has caused further shortfalls, delays and cost overruns. Moreover, because of the accumulated debts, the NHA has to pay high interest costs to the government of Pakistan.
The report noted that it is also exposed to foreign exchange risks due to the issuance of foreign re-lent loans. Additionally, the high depreciation costs that the NHA bears create a large non-cash expense that drags down its books. However, these non-cash accounting expenses and CDL loans exaggerate the financial and operational concerns of NHA.
As a result of these concerns, NHA was excluded from the Triage Report of 2021 and the government has initiated the restructuring process.
Potentially the NHA’s restructuring may include renegotiation of loan terms, debt refinancing options, and optimisation of operational efficiency and revenue diversifications.
The profitability of motorways and national highways can broadly depend on four factors: operation costs, maintenance costs, actual toll traffic, and revenue. Further assessments are also made on metrics such as: projected traffic volume, proposed toll, and projected rate of return on a given project, concession period and project financing. Therefore, categorisation of projects is conducted on a case to case basis with comprehensive analysis on financial, technical, ecological, economic and other such grounds.
Alternatively, some projects may be unsuitable from commercial standpoint and therefore fall under the ambit of developmental projects. Such projects preclude the profit motive with goals, such as increasing market access, infrastructure connectivity and other positive externalities, weighing more heavily.
The bank stated that NHA serves as an example of an entity that requires clear objectives and performance benchmarks. As in the case of Lithuanian Railways (LR), it may be useful to split NHA’s corporate structure into two distinct entities, one which undertakes commercial projects, and the other for developmental and public service obligation projects.
Breaking the NHA’s into two separate entities will mean that the commercial side can remain a commercial SOE and be accountable to make a profit, whereas the non-commercial section can be classified as a non-commercial entity and can focus on the government’s developmental imperatives.
Both may report to a NHA holding company that can offer shared services. The splitting of NHA into two separate entities may also allow the commercial arm to focus on profitable ventures and create alternative means of financing projects on the merit of its balance sheet, for example, capital markets, commercial bank loans, public-private partnerships (PPP), etc. This would be in line with growing trends of private sector participation in road infrastructure projects.
The report noted that the involvement of the private sector has some advantages that help in the construction and operation of such infrastructure. The private sector is less prone to political interference, can be more innovative with pricing and construction and have suitable long term financing coupled with long term revenue needs (e.g. insurance and pension funds).
However, there are mixed outcomes in terms of efficiency, and there needs to be a strong regulatory and monitoring presence of the public sector to avoid quality lapses and monopolistic pricing concerns. In this regard, the inclusion of three BOT (build, operate and transfer) projects in NHA’s development plan for 2023-24 is promising. In addition to PPP mode, the NHA may also diversify revenues by developing land on the sides of the road as commercial property, as was done successfully in India.
This will supplement toll income and right of way charges, to mitigate any losses as a result of lower tolls or vehicle volumes, and attract more private investment. In the absence of detailed financial statements, the falling share of NHA’s toll revenue as a percent of its total revenue seems to indicate a shift in this direction.
The report recommended that the government may also take a holistic view, and, where possible, create healthy competition between rail, roads and air transport networks to offer more choices, improved service delivery, and better pricing, as creating competition between substitute industries helps SOEs become more efficient and enhance service delivery.
Copyright Business Recorder, 2024
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