Road execution likely to dip by up to 10% in FY25, says CareEdge

India’s pace of constructing national highways may be dented by up to 1,250 kilometres in 2024-25 and slow down to 31 kilometres per day, owing to execution challenges for the construction sector, rating agency CareEdge said on Tuesday.

“National Highways construction pace is expected to slow down from 12,350 kilometres in FY24 to 11,100-11,500 kilometres in FY25. The rising competitive landscape, escalating execution challenges, increasing project complexities, rising participation of moderate sponsors, and elongation in receipt of appointed date from award are key challenges faced by the roads sector,” the rating agency said in its report.

According to Maulesh Desai, director at CareEdge, these factors have stretched the project completion cycle for highways from 2.75-3.25 years earlier to around 3.5-4 years now.

 

“Notwithstanding the healthy order book of road developers, these factors are likely to result in a subdued pace of road construction for the National Highways Authority of India,” he said.

The Centre has focused heavily on projects under the Hybrid Annuity Model (HAM). In HAM, the authority pays 40 per cent of the project cost to the developer upfront, while paying the rest in annuities. Other models such as EPC require more outgo of funds from NHAI, while the Build Operate Transfer (BOT) model has not been a hit due to risk aversion in the sector.

The agency said that it has observed significant delays in the execution of HAM projects.

Of the overall sample of HAM projects awarded after March 2020 amounting to Rs 1.50 lakh crore, approximately one-third of the projects with an aggregate Bid Project Cost (BPC) value of Rs 50,000 crore are facing delays ranging from four to six months beyond the grace period of three months. These projects have applied for or received an extension of time (EOT) of a similar or longer period.

Notably, another significant portion of NH-HAM projects with an aggregate bid project cost value of Rs 40,000 crore as of April 1, 2024, are still awaiting issuance of appointed date for more than a year as compared to Rs 14,500 crore as of June 30, 2023.

“Of the total awards of 12,300 kilometres by the National Highways Authority of India in FY22 and FY23, 20 per cent continue to await an appointed date for more than one year,” CareEdge said.

HAM projects account for 55 per cent of all projects awarded since the onset of Covid-19, which had induced a severe liquidity crunch in the capital-intensive sector.

The permissible execution span for projects is uniform at two years, irrespective of whether it is a greenfield or a brownfield project, or how complex it is to structurally execute, which has further contributed to the project delays.

The agency also mentioned the decline in the award of new and brownfield projects from the Ministry of Road Transport and Highways (MoRTH).

“FY24 witnessed a downturn, with project awards declining by 31 per cent compared to the previous financial year and way below the Ministry target of 13,290 kilometres for FY24. The decline in awards was steeper than expected, primarily due to pending approval of revised cost from the cabinet towards projects under Bharatmala Pariyojana. A decrease of 10-15 per cent in awards was already anticipated due to legislative elections and the subsequent imposition of the code of conduct. However, these factors combined have led to a further reduction in the pace of project awards,” the rating agency said.

This paper reported in November that the Ministry of Road Transport and Highways told the Union Cabinet that its highway award target was headed for a failure as the latter had not approved the revised Bharatmala cost estimates.

In a significant inter-departmental deadlock earlier this month, the ministry once again publicly faulted the delay in cabinet approval for missing the target. MoRTH awarded 8,581 kilometres of highway projects in the preceding financial year – 35 per cent shy of its target.

"As project complexities rise and timelines elongate, it is imperative to swiftly address bottlenecks thus ensuring seamless infrastructure development. Going forward, CareEdge Ratings estimates a significant reduction in the share of EPC projects from around 50 per cent to 25-30 per cent due to awarding through revised toll concessions. This shall also help in reducing the funding requirements of NHAI while focusing on the quality of construction,” Desai said.