Execution of hybrid annuity model (HAM) projects, the preferred mode of awardby the National Highways Authority of India (NHAI), is largely on schedule. About 60 per cent of projects covering ~3,200 km of roads are either complete or being executed on time. The rest of the projects are delayed largely owing to weak sponsors, according to a CRISIL report.Many NHAI HAM projects are set to become operational in the near term. Their credit profiles will improve significantly because of reduced implementation risk and healthy cash-flow visibility, backed by strong counterparties. This will enhance the refinancing ability of projects. CRISIL Ratings has analysed all HAM road projects awarded between fiscals 2016 and 2018, spanning 5,400 km, as the bulk of execution should have ideally taken place in these projects. NHAI introduced HAM in January 2016 and has awarded more than 40 per cent of roads under this model over the past five years. Going forward, around half the awards by NHAI are expected to be through HAM. Hence, it is essential to understand their execution performance. “Of the 5,400 km of roads analysed, ~1,400 km are operational,”says Anand Kulkarni, Director, CRISIL Ratings. “A large portion of these were completed six months ahead of schedule and only a few faced moderate delays. Timely land availability and approvals supported execution. We expect another ~1,800 km of roads, which are in advanced stages of construction, to be completed on time in the near term.” Of the delayed projects, spanning ~2,200 km, nearly two-thirds (~1,400 km) are being executed by a few weak sponsors with constrained liquidity, which has impacted project execution. Most of the sponsors double up as contractors, which has hurt the pace of execution. Other obstacles include right of way, extended monsoon, cyclones and execution challenges stemming from the COVID-19 pandemic. Nonetheless, 18 per cent of the delayed projects are in advanced stages and are likely to get completed in the near term. “Operational or soon-to-become operational projects of around 3,600 km could see a sharp improvement in credit quality, driven by structural safeguards to limit interest rate and inflation risks, as well as annuities from strong counterparties,”says Priyanka Patawari, Associate Director, CRISIL Ratings. “This will provide an opportunity to refinance ~`320 billion of debt with cheaper debt over the next 12-18 months.” The structural safeguards are underlined by inflation-adjusted receipts of maintenance compensation and linking of the interest received on annuity to an external benchmark rate. The interest on annuity was linked to the bank rate before November 2020, which exposed the projects to the risk of divergent movements in the bank rate (interest inflow) and marginal cost of funds-based lending rate, or MCLR (interest outflow). In November 2020, the interest on annuity was benchmarked against MCLR, which is favourable for HAM projects. That said, the recent relaxation in bidding norms by the Ministry of Road Transport and Highways (MoRTH), which also covers NHAI projects, may result in more aggressive bidding and weaker sponsors entering the fray. According to CRISIL, this will bear watching as it could hamper construction quality and implementation timelines.