Road projects under the hybrid annuity model (HAM) are on a steady drive, with more than 90% of the project length under development being constructed on schedule or facing marginal delays. A large proportion of such delayed projects are eligible for extensions, too. This outcome is despite increased bidding intensity impacting the profitability of project sponsors. Such timely execution and comfortable debt protection metrics will support the credit risk profiles of these projects.

A Crisil Ratings analysis of a rated pool of ~1,400 kilometre¹ (km) of under-construction HAM projects, awarded by the Ministry of Road Transport and Highways (MoRTH)², indicates as much.

Over the past five fiscals, excluding 2024, about a quarter of the projects awarded by MoRTH were under HAM, underlining the model’s significance in the sector. Its success can be attributed to provisions such as requirement of at least 80% right-of-way (ROW) availability before the declaration of appointed date, de-scoping and de-linking of project length where ROW has not been received, and inflation and interest-rate hedging given indexation of cash flows. These features have collectively contributed to healthy project execution.

Says Anand Kulkarni, Director, Crisil Ratings Ltd, “Our experience is, nearly 66% of under-construction project length is expected to be on or before schedule. Another 26% is either delayed marginally or awaiting approval for timeline extension. These extensions are to account for delays that are not attributable to concessionaires, such as non-availability of ROW, or events such as heavy rains, ban on mining, etc. This leaves only 8% of project length under construction facing material execution-related challenges.”

Lack of necessary approvals in a few specific projects and liquidity constraints faced by some sponsors, which hindered their ability to infuse equity in a timely manner, are the key reasons for execution delays.

The ministry’s framework to replace sponsors³ of projects facing challenges - in consultation with lenders and willing concessionaires - has helped bring execution of some of the delayed projects back on track. Further, timely termination of some projects facing challenges and re-awarding them has also supported project implementation.

Says Saina Kathawala, Associate Director, Crisil Ratings Ltd, “Once completed, the HAM projects typically witness strong credit profiles due to inherent structural benefits such as timely receipt of steady cash flows from a central counterparty. Additionally, comfortable debt coverage metrics of Crisil rated portfolio, as reflected in an estimated average debt service coverage ratio of 1.3-1.4 times, support the credit risk profiles of these projects.”

While credit risk profiles have remained stable so far, with the increasing popularity of HAM and the relaxation in bidding norms⁴, the number of bidders has more than doubled over the last four fiscals. The impact of competitively bid projects on profitability of sponsors and their ability to timely infuse funds or absorb cost escalations will bear watching.

¹ Includes HAM projects awarded since fiscal 2016
² MoRTH awarding includes projects awarded by the National Highways Authority of India
³ Harmonious substitution
⁴ Changes such as relaxation in the financial eligibility criteria to a minimum net worth of 15% of estimated project cost from 25% earlier and reduction in the order size were made to the bidding criteria in October 2020