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Home >Industry >Infrastructure >HAM road projects on track, but those of weak sponsors a concern: Crisil

Mumbai: 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 with about 60% of projects, covering 3,200 km of roads, completed on time.

The rest of the projects, however, 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," said rating agency Crisil in a report.

Crisil Ratings has analyzed 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, the agency said.

NHAI introduced HAM in January 2016 and has awarded more than 40% of roads under this model over the past five years. Going forward, around half of the awarding by NHAI is expected to be through HAM. Hence, it is essential to understand their execution performance.

“Of the 5,400 km of roads analysed, 1,400 km are operational. A large portion of these was 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," said Anand Kulkarni, director, Crisil Ratings.

Of the delayed projects, spanning 2,200 km, nearly two-thirds (~1,400 km) (details in the annexure), 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.

“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 ~ 32,000 crore of debt with cheaper debt over the next 12-18 months," said Priyanka Patawari, associate director, Crisil Ratings.

The structural safeguards are underlined by inflation-adjusted receipts of maintenance compensation and linking of the interest received on annuity to an external benchmark rate. The interest on annuity was linked to the bank rate before November 2020, which exposed the projects to the risk of divergent movements in the bank rate (interest inflow) and the marginal cost of funds-based lending rate, or MCLR (interest outflow). In November 2020, the interest on annuity was benchmarked against the MCLR, which is favorable for HAM projects.

That said, 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, Crisil added.

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