Hybrid Annuity Model Emerges As The Way Forward For Road Projects

Hybrid Annuity Model (HAM) seems to be the order of the day, when it comes to road projects in the country. Facts and figures also back up this proposition. Over the past five fiscals, excluding 2024, about a quarter of the projects awarded by Union Ministry of Road Transport and Highways (MoRTH), including those awarded by National Highways Authority of India, 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 per cent 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. Moreover, road projects under the hybrid annuity model (HAM) are on a steady drive, with more than 90 per cent 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 the projects. That is what CRISIL Ratings feels. A CRISIL Ratings analysis of a rated pool of nearly 1,400 km of under-construction MoRTH-awarded HAM projects indicates as much. Studies indicate that nearly 66 per cent of under-construction project length is likely to be on or before schedule. Another 26 per cent 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 eight per cent of project length under construction facing material execution-related challenges. These execution delays can mostly be attributed to 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.

Interestingly, the ministry’s framework to replace sponsors of projects facing challenges — in consultation with lenders and willing concessionaires — has helped bring execution of some of the delayed projects back on track. Timely termination of some projects that were facing challenges and re-awarding them has supported project implementation. It has been noticed that once completed, HAM projects typically witness strong credit profiles due to inherent structural benefits such as timely receipt of steady cash flows from a central counterparty.

Quite significantly, while credit risk profiles have remained stable so far, as a result of the growing popularity of HAM and the relaxation in bidding norms, changes like relaxation in the financial eligibility criteria to a minimum net worth of 15 per cent of estimated project cost from 25 per cent earlier and reduction in the order size were made to the bidding criteria, 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 be eagerly watched.