CRISIL Ratings today assigned India’s first rating for a road project based on the hybrid annuity model (HAM). The rating, ‘CRISIL A/Stable’, was assigned to the bank facilities of Sadbhav Bhavnagar Highway Pvt Ltd (Sadbhav Bhavnagar), a special purpose vehicle of Sadbhav Infrastructure Project Ltd, which, in turn, is a subsidiary of Sadbhav Engineering Ltd.
Sadbhav Bhavnagar was set up to execute the four-laning of the Bhavnagar-Talaja section of National Highway 8E, which spans about 48 km, at a cost of Rs 819 crore.
The National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’) introduced HAM to encourage greater participation of private sector players under which it would fund 40% of the project cost. This reduced the equity infusion requirement of the developer during the construction phase.
The NHAI also guarantees fixed annuity payouts. Additionally, operating and interest costs get adjusted for inflation and prevailing interest rate in the operational phase.
Says Sachin Gupta, Senior Director, CRISIL Ratings, “Over the past couple of years, the key risks impeding India’s highway construction goals were implementation and financing. These have been largely mitigated, and the game has changed for the better, following facilitations such as upfront contribution by the NHAI, government assistance in land acquisition, and expeditious approvals. Consequently, the construction phase of HAM projects is fairly ring-fenced.”
Half of the road projects awarded under HAM achieved financial closure a year after the NHAI introduced it, though some of them are facing challenges largely with respect to the ability of sponsors to infuse equity and aggression when bidding for projects.
Says Sushmita Majumdar, Director, CRISIL Ratings, “Project viability based on bidding parameters and financial support, as well as the wherewithal of sponsors, will be critical to any credit assessment of HAM projects during the construction phase.”
Sadbhav Bhavnagar’s rating factors in the inherent benefits of HAM, substantial right-of-way and approvals accorded low funding risk and expected operational and financial support from parent Sadbhav Infrastructure Project Ltd.
Construction work of the Bhavnagar highway project commenced in February 2017. The initial stage of the project exposes the company to moderate implementation risk. However, Sadbhav Bhavnagar is a low-complexity project and the implementation risk is mitigated to an extent by the fixed-price, fixed-time contract with, and strong project execution capabilities of, Sadbhav Engineering Ltd. Any delays in project implementation will remain the key rating sensitivity factor.