Crisil Cites “HAM In A Jam” To Lower Road Project Execution Target
Road projects awarded under the National Highway Authority of India’s hybrid annuity model, where the government and private developers share the costs, are stuck in a jam, Crisil said, prompting it to mark down the execution forecast for the current fiscal.
The new road-building model was introduced in 2016 by Union Minister Nitin Gadkari, who has also set an ambitious target of building 40 km of roads every day.
Under HAM, the state sponsors 40 percent of the project cost which is spread across tranches anchored to milestones. The remaining cost is borne by the private entity.
The research agency, in a report named "HAM in a jam", claimed successful bidders are yet to receive contract letters from the NHAI. A road builder begins work on any project only after the letter is received.
We estimate around 800 km of execution is at risk this fiscal because many hybrid annuity model (HAM) projects are still awaiting appointed dates seven months after they were awarded.Crisil Research Report
In its latest report, Crisil brought down the average pace of construction to 9.9 to 10.4 km per day, which translates to 3,600–3,800 km for the entire year, versus its earlier projection of 4,300 km in FY19.
Crisil said land acquisition for most of the ongoing projects is in advanced stages, but lenders would begin disbursements only after the mandatory 80 percent land is in the 3G stage, when the authorities start finalising the compensation for land owners.
NHAI will have to pay annuity to the road developers for the delay, adding to its financial burden, Crisil said.
Of the 1,913 km of HAM projects considered for analysis by Crisil, around 390 km were pending financial closure and around 180 km projects have gone past the five-month window open for financial closure.
The situation, however, is better for projects under the engineering, procurement, construction model, where NHAI has a larger window to complete land acquisition, Crisil said.
The report said that as per data, financial closures were being achieved at an 80:20 debt-to-equity ratio, resulting in an equity share of 12 percent of the total project cost for a developer.
Lack Of Financial Closure
Another factor, hurting project execution is the cautious approach adapted by financial lenders, Crisil said.
The 11 state-run lenders put under the RBI’s prompt corrective action framework, contributed 18 to 20 percent of the total bank credit. The stricter rules, prohibit them from lending to under-construction road projects, according to the research firm.
The "short-term liquidity crisis" has prompted non-bank lenders to also turn cautious.
The HAM model, according to the research agency, was created to incentivise bankers by lowering overall project risk so that they could lend more to public-private partnership projects. The model includes clauses such as guaranteed partial payment from the NHAI even in case of default by the private player or termination of agreement.