Apprehensions of bidding intensity in hybrid annuity model (HAM) projects offered by the National HighwaysAuthority of India (NHAI), and consequent fear that many of these projects will not achieve debt tie-up, have beenput to rest with 90% of all awarded HAM projects – worth over Rs 1 lakh crore – achieving debt funding, a CRISILanalysis shows.

A moderation in the pace of highway projects awarded in fiscal 2019 afforded developers the latitude to arrange forfunding and focus on execution. Less than 3,000 km of projects were bid out in fiscal 2019 compared with an alltimehigh 7,400 km in fiscal 2018.

The debt tie-ups have been driven by low risks in HAM, ultimately prudent bids, and track record of execution ofstrong and experienced sponsors. As indicated in CRISIL’s press release on June 7, 2018, titled, ‘Highway HAMbids still prudent, debt levels remain viable’ – bids continue to be prudent with L1 (lowest) bids 15% higher onaverage than NHAI’s estimated engineering, procurement and construction, or EPC, costs. Also, the number ofbidders are limited at 5-10 as against 25-30 bidders per project in 2010-12.

Says Sachin Gupta, Senior Director, CRISIL Ratings, “There were apprehensions because 8-10 bidders hadgarnered lion’s share of HAM projects leading to concentration risk. Besides, at that point in time, 11public sector banks were placed under the Reserve Bank of India’s Prompt Corrective Action (PCA)framework, which aggravated the funding risk for these projects. However, developers with establishedtrack record of project implementation have been able to achieve timely debt tie-ups. Now, with 6 bankscoming out of PCA, ease of funding will further improve.”

That said, physical progress of projects is tardy given slow traction on ‘Appointed Date’ – which marks the start of aproject concession period. Only 60% of the 108 HAM projects bid till the middle of last fiscal have received it so far.

But that’s a blessing in disguise, because NHAI notifies the Appointed Date only when majority of the land (80% forHAM projects) is procured. This ensures that once a project is under construction, there is limited risk of delaysdue to non-availability of land.

Wary of this, bankers stipulated that debt drawdowns are contingent upon 80% right of way (RoW) being availableat least by the 3G stage of land acquisition - where compensation to landowners is finalised. Previously, onlynotification of land by the government had to be completed for drawdowns to begin.

These measures have given a new lease of life to the sector that’s been historically plagued by land and approvalissues, leading to stalled projects.

Says Sushmita Majumdar, Director, CRISIL Ratings, “Given at least 40% of the existing order book is HAM,developers need to bring in equity to manage their balance sheets. That means, the ability to sell stake inprojects and free up capital is crucial. We have seen some deals happening already. This would helpsustain growth in order book without impacting credit risk profile.”

CRISIL believes HAM will remain a good mode of awarding highway contracts and will be preferred by both theNHAI, EPC players, and lenders. The key monitorable in the road ahead will be timely construction and completionof projects and receipt of payment from the NHAI.