Five Years On, HAM Unclogged India’s Highway Pipeline. But Gaps Persist.

India's highway construction in public-private partnership collapsed after the peak of 2011-2012. Partly because returns from aggressive bidding of the past didn't live up to expectations. And land acquisition was invariably delayed, increasing costs. Banks, too, became reluctant to fund projects as their bad loans rose.

In January 2016, the National Highways Authority of India came up with the hybrid annuity model. It’s a combination of outright government-funded contracts and the built-operate-transfer system where the bidder has to bring in capital and recover the money over a period of time.

Share of HAM projects rose quickly and the pace of highway construction spiked, hitting the a record of 36.5 kilometres a day in 2020-21. The model ran into trouble because of the liquidity crisis after the collapse of IL&FS Financial Services Ltd., prompting the government to tweak some of the norms.

Under HAM, the government shares 40% of the costs and provides some funds upfront, while the private bidder contributes the remaining 60%. That takes away dependence on toll collection to make projects financially viable.

It replaced the build-operate-transfer model that had two options. Private parties recovered investment via toll or received payments from the government at regular intervals during the concession period.

In the last five years, lower risk drew bidders, with the NHAI handing out 46% of total highway projects under the hybrid model, according to data shared by India Ratings and Research Ltd. The NHAI has awarded more than 200 projects under HAM and, of that, around 35 are operational and 90 are under construction.

One of the key hurdles for infrastructure projects was delay in land acquisition. The hybrid model tried to fix that gap.

The project execution remained healthy under HAM because the work doesn't commence till approval for at least 80% of the land to be acquired is received, Anuj Sethi, senior director at Crisil Ratings, said.

Yet, HAM faced some of the problems with earlier models.

Delays Persist

About 40% of projects still face delays, according to contracts analysed by Crisil and India Ratings separately.

Of 90 under-construction HAM projects India Ratings analysed, 41% were running behind schedule. Projects handled by sponsors with strong financials fared better, Rishabh Jain, analyst, infrastructure and project finance at India Ratings, said.

India Ratings rates sponsors as:

• Strong: Credit rating of A+ or above.

• Medium: A to BBB.

• Weak: Below BBB.

It also takes financial performance into account while classifying the sponsors.

Apart from sponsor quality, Jain cited behind-schedule land acquisition, delay in descoping of unavailable land (or approval to commission project on land already acquired), and force majeure events slowing down pace of projects.

Authority-related issues contribute the most to delays at 15%, followed by force majeure events (14%), sponsors (10%) and disbursement by lenders (2%), Jain said.

Crisil found that of the 5,400-km HAM projects awarded between fiscals 2016 and 2018, about 60% covering 3,200 km of roads are either ready or being executed on time. The rest are delayed largely due to weak sponsors.

Of the delayed projects spanning 2,200 km, nearly two-thirds (about 1,400 km) are being executed by a few weak sponsors with constrained liquidity, Crisil said. Most of the sponsors double up as contractors, hurting execution pace.

The other obstacles, according to Crisil, include right-of-way (or total width of area acquired), extended monsoon, cyclones, and execution challenges stemming from the Covid-19 pandemic.

Still, according to Crisil, 18% of the delayed projects are in advanced stages and are likely to get completed in the near term. Meaning, about 20% of the projects are facing long delays.

Jain of India Ratings, however, said resolution for delayed projects will vary.

A project with limited work done or stuck at the last mile can be rebid or sold to a new sponsor, he said. But if a project stuck midway with poor fund allocation and bad construction quality, Jain said it could take significant amount of time to revive.

Emails or text messages to Ashoka Buildcon Ltd., MEP Infrastructure Ltd. and Sadbhav Engineering Ltd., among companies executing HAM projects, remained unanswered.

The NHAI has been trying to fix some of the persisting issues.

The interest on annuity was linked to the bank rate before November 2020, which exposed the projects to the risk diverging movement of the bank rate (interest inflow) and marginal cost of funds-based lending rate or MCLR (interest outflow), Crisil said. In November 2020, the interest on annuity was benchmarked to the MCLR, which is favourable for HAM projects, it said.

Some of the changes, however, have sparked concerns. Crisil cautioned that eased bidding norms by the Ministry of Road Transport and Highways 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.”

Rajeshwar Burla, vice president and group co-head at ICRA Ltd., said increasing competition is already putting pressure on bid pricing at a time raw material costs are rising.

Bitumen surged 50-60%, steel rallied 30-40% and cement rose 5-10% in the year through March 2021, he said. While the inflation risk is covered through weighted average of 70% of wholesale index and 30% of consumer index, he said the impact of costlier raw materials would be relatively higher on the returns of HAM project developers.

Still, Crisil estimates that 3,600 km of HAM roads are expected to operational over the next 12-15 months.

And ICRA, too, maintains a stable outlook. “At least 45-50% of awards from the NHAI are expected to be through HAM in near to medium term,” Burla said. “This will remain a dominant model.”