NHAI highway contracts slip to 3-year low in H1 FY23

Highway project award by the National Highways Authority of India (NHAI) has slipped to a three year low in the first half of the current financial year, owing to sharp rise in commodity prices, higher premium demand by developers and policy changes. According to CRISIL, NHAI has awarded only 777 km of road projects in H1 FY23, which is a three year low and 60% lower than the highway length awarded in the same period of the previous financial year.

“Slackened pace of execution and highly inflated prices of key input materials (owing to uncertainties arising out of global geopolitical tensions) have acted as major impediments to awarding momentum,” CRISIL said while making a point that the dismal awarding is despite the fact that the higher number of projects were put on the tendering block. The agency, however, expressed hope that the process is likely to pick up in the second quarter of the fiscal.    

“NHAI has already floated tenders for 2,200 km so far this fiscal — as much as 36% more than in the same period last fiscal — and considering the ramp-up that typically happens in the fourth quarter, awarding in the second half of the fiscal is expected to improve substantially,” it said. However, this will still dent the tally for the current fiscal compared with the previous year’s record, it added.

“Awarding for the full fiscal is still likely to moderate on-year. We expect 4,800-5,200 km of awards this fiscal, much lower than the 6,306 km awarded last fiscal,” the agency said.  

According to CRISIL, out of the total length awarded till date in the year, hybrid annuity model (HAM) projects cornered a healthy 51% share, while engineering, procurement and construction (EPC) accounted for the rest. “The shares are expected to remain at current levels for the full fiscal as well, with HAM accounting for 45-50%, EPC for 45-50%, and build-operate-toll (BOT) for less than 5%,” the agency said. According to the findings of the agency, the projects have also seen a reduction in the number of bidders.

“In sharp contrast to last fiscal, which saw ten to fifteen bidders on average per project, HAM awards in the first half of the fiscal saw only five to seven bidders on average. Indeed, 61 percent of the HAM projects awarded so far this fiscal have been won by large-sized developers compared with 57% last fiscal, CRISIL said, attributing the fall to sharp rise in commodity prices and complex project awards in difficult terrains warranting the developers to seek a higher premium to maintain their margins.

Policy changes like removal of operations and management (O&M) cost as a criterion for awarding averted developers from quoting abnormally low O&M bids to win projects, the agency said. “Many mid-sized developers who won projects in the past two years exhausted their balance sheet capacities, which prevented them from participating in bids this fiscal,” it added.