National Highway construction to decline 7-10% in FY25: CareEdge

The pace of construction of national highways is expected to slow down -- from 12,350 km in financial year 2023-24 (FY24) to 11,100-11,500 km in FY25 -- according to a report by CareEdge Ratings.

“CareEdge Ratings expects a decline in the pace of construction of national highways by 7-10% in FY25 as compared to FY24. 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,” said the rating agency in its forecast for FY25.

The national highways Hybrid Annuity Model (HAM) projects, with an aggregate length of over 2,200 km, are yet to commence even after a year since it was awarded.

“All the above factors have stretched the project-completion cycle from earlier 2.75-3.25 years to around 3.50-4 years. Notwithstanding the healthy orderbook of road developers, these factors are likely to result in a subdued pace of road construction for NHAI,” said Maulesh Desai, Director, CareEdge Ratings.

Desai said that 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 engineering, procurement, and construction (EPC) projects from around 50% to 25-30% 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. Under revised toll concessions, funding requirement for NHAI shall reduce to 20%-32.5% of project cost as against 100% for EPC projects. At the same time, peak debt requirement is likely to be lower by 10% vi-a-vis old BOT-Toll concessions due to equity support from NHAI,” he added.

The government’s steadfast commitment to infrastructure development has been highlighted by a significant increase in project awards after Covid-19, particularly during FY22-FY23.

This period accounted for nearly 50% of the projects awarded in the last five years ending in FY23.

However, FY24 witnessed a downturn, with project awards declining by 31% compared to the previous fiscal year and a below ministry target of 13,290 km for FY24.

Decline in awards was steeper than expected, primarily due to pending approval of revised cost from cabinet towards projects under Bharatmala Pariyojana.

“A decrease of 10-15% in awards was already anticipated due to legislative elections and the subsequent imposition of the code of conduct. However, these factors have led to a further reduction in the pace of project awards,” said the report.

BOT-HAM (Hybrid Annuity Model) has been the preferred mode of award, constituting around 55% of the total projects awarded during FY21-FY24. CareEdge Ratings has observed significant delays in the execution of such 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 4-6 month delays beyond the grace period of three months.

These projects have applied or received an extension of time (EOT) of a similar or longer period. Notably, another significant portion of NH-HAM projects, with an aggregate BPC value of Rs 40,000 crore as of April 1, 2024, are still awaiting issuance of Appointed Date of more than a year as compared to Rs 14,500 crore as of June 30, 2023.

Of the total awards of 12,300 km by National Highways Authority of India (NHAI) in FY22 and FY23, 20% have been waiting for the appointed date for more than a year.