Signs of stress in Hybrid Annuity Model road projects: India Ratings

NHAI has maintained its 2024-25 outlook for both annuity projects and toll-collecting assets at stable

Highway projects, especially those awarded under the National Highways Authority of India’s (NHAI) annual payments model Hybrid Annuity Model (HAM), could see stress going forward with some developers struggling to achieve financial closure and authorities facing delays in land acquisition, Fitch Group’s India Ratings and Research said on Thursday.

“Certain pockets in the sector have had excessive competition in the past. We have seen that small and medium-sized players have largely been able to execute projects, but newer sponsors could face issues. We have seen that some HAM projects have undergone substitution,” Vishal Kotecha, director and head at India Ratings and Research, told Business Standard.

Over the past years, the road sector has seen increased competition, leading to lower bid premiums and possibly the entry of players who do not have skin in the game, experts have opined in the past. Some of these developers are now struggling to secure borrowings for their projects.

“The new developers, many of which had transitioned from engineering, procurement, and construction (EPC) to HAM for the first time post the relaxation in the technical and financial norms, have subsequently struggled to secure funding, as banks have tightened capital requirements. The number of projects awaiting the appointed date has increased to more than 110 projects, worth over Rs 1 trillion, with financially strong and medium sponsors facing delays, mainly due to issues related to the acquisition of land,” the rating agency said.

However, the agency has maintained its 2024-25 outlook for both annuity projects and toll-collecting assets at stable.

This is not the first time a rating agency has brought out the underlying concerns within the sector. Earlier this month, CareEdge said that there were delays in HAM projects.

Of the overall sample of HAM projects awarded after March 2020, amounting to Rs 1.5 trillion, approximately one-third of the projects with an aggregate bid project cost (BPC) value of Rs 50,000 crore are facing delays ranging from four to six months beyond the grace period of three months. These projects have applied for or received an extension of time (EOT) of a similar or longer period.

Another significant portion of HAM projects with an aggregate BPC value of Rs 40,000 crore as of April 1, 2024, are still awaiting the issuance of the appointed date for more than a year compared to Rs 14,500 crore as of June 30, 2023, the agency said.

The impact of the removal of operations and maintenance from bidding parameters, additional performance guarantees for exceptionally low bids, and minimum credit rating requirements will be key variables to monitor, India Ratings and Research said.