New Delhi– Noting recent positive trends in the Indian highways sector, American investment banking firm Jefferies on Wednesday said there was an increase in bids under the government’s hybrid annuity model for roads building.
“Macro developments suggest positive trends in the sector with pickup in execution. Recent bids in Hybrid Annuity model (HAM) in May-June has seen participation increasing from two-four players to seven-eight players as risk-reward is favourable,” the Jefferies India said in a report.
“Consequently, bids have become slightly aggressive as competition is becoming cognizant of the favourable risk-reward scenario in HAM versus EPC (engineering, procurement and construction) versus BOT (build-operate-transfer) model,” it said.
“Execution was strong in May at a 22 km per day completion run-rate, and will be closely watched for in the coming months,” it added.
Under HAM approved earlier this year, the government commits up to 40 per cent of the project cost over a period and hands the project to the developer to start work, clearing the way for restarting work on stalled road projects.
Noting that non-performing assets (NPAs), or bad loans, have come down in the construction equipment segment suggesting borrower cash flows are improving, the report said construction gear growth was exponential during January-June this year due to public spending in the road sector and improvement in National Highway Authority of India’s (NHAI) payment cycle.
The NHAI in March invited bids for five projects under the hybrid annuity model.
“A total of six projects extending up to 209 km and worth Rs 41 billion were awarded by NHAI in May 2016. Of this, five have been on HAM and only one on EPC mode.
“This is in line with ministry’s commentary on awarding close to 85-90 per cent of the projects on HAM and EPC mode,” Jefferies said.
“Media reports suggest that the ministry is working on a complete list of projects which it intends to award to achieve the 25,000 km overall FY17 target to lend more credibility to the target,” it added.
The government has set a target of constructing 25,000 km of national highways during 2016-17 — up from 10,000 km in 2015-16.
According to the Road Transport and Highways Ministry, of the total length of national highways targeted for award, 15,000 km would fall under NHAI, while the remaining 10,000 km will be under the purview of the ministry and National Highways and Infrastructure Development Corporation.
The ministry said the last fiscal had many positive outcomes such as construction of 6,000 km of national highways, which marked a year-on-year increase of nearly 36 per cent.
“The speeding up of road projects has been made possible due to several policy interventions which include the ministry being empowered to decide mode of delivery, increased threshold for project approval, enhanced inter-ministerial coordination exit policy,” an official statement said.