Execution of hybrid annuity model (HAM) projects, which is the preferred mode of awarding by the National Highways Authority of India (NHAI), is largely on schedule. About 60% of the projects covering ~3,200 km of roads are either completed or being executed on time. Rest of the projects are delayed largely due to weak sponsors.

Many NHAI HAM projects are set to become operational in the near term. Their credit profiles will improve significantly because of reduced implementation risk and healthy cash-flow visibility, backed by strong counterparties. This will enhance the refinancing ability of the projects.

CRISIL Ratings has analysed all the HAM road projects awarded between fiscals 2016 and 2018, spanning 5,400 km, as the bulk of execution should have ideally taken place in these projects.

Anand Kulkarni, Director, CRISIL Ratings, said, "Of the 5,400 km of roads analysed, ~1,400 km are operational. A large portion of these were completed six months ahead of schedule, and only a few faced moderate delays. Timely land availability and approvals supported execution. We expect another ~1,800 km of roads, which are in advanced stages of construction, to be completed on time in the near term." 

Of the delayed projects, spanning ~2,200 km, nearly two-thirds (~1,400 km) are being executed by a few weak sponsors with constrained liquidity, which has impacted the project execution. Most of the sponsors double up as contractors, which has hurt execution pace. The other obstacles include right-of-way, extended monsoon, cyclones, and execution challenges stemming from the Covid-19 pandemic. Nonetheless, 18% of the delayed projects are in advanced stages and are likely to get completed in the near term.

Priyanka Patawari, Associate Director, CRISIL Ratings, said, "Operational or soon-to-become operational projects of around 3,600 km, could see a sharp improvement in credit quality, driven by structural safeguards to limit interest rate and inflation risks, as well as annuities from strong counterparties. This will provide an opportunity to refinance ~Rs 320 billion of debt with cheaper debt over the next 12-18 months."

The recent relaxation in bidding norms by the Ministry of Road Transport and Highways (which also covers NHAI projects) may result in more aggressive bidding and weaker sponsors entering the fray. This will bear watching as it could hamper construction quality and implementation timelines.