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Road construction in India to witness 7-10% slowdown in FY25 due to challenges in execution: CareEdge Ratings

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Pace of road construction in India is expected to witness a 7-10% decline in 2024-25 with the daily construction estimated at 31 km per day as against 34 km per day in 2023-24 due to heightened challenges in execution, the CareEdge Ratings said on Tuesday.
This will result in the national highways construction to slow down to 11,100 km to 11,500 km in this financial year as against 12,350 km in FY ’24, it said.

“Increasing project complexities, rising participation of moderate creditworthy sponsors and significant delay in the receipt of appointed date post award of the project are expected to pull down the execution pace by 7-10% during FY25 to around 31 km per day,” it added.

According to CareEdge Ratings, with the announcement of greenfield expressways and highways, the challenges towards land acquisition have aggravated, thereby elongating the receipt of the appointed date.

“Also, the permissible execution span for projects is uniform at two years, irrespective of the project scope whether brownfield or greenfield expressway, which has further contributed to the project delays,” it said.

“All the above factors have increased the project completion cycle from earlier 2.75-3.25 years to around 3.50-4 years presently, resulting in a higher turnaround time for project execution and a subdued execution pace in the sector,” it added.CareEdge Ratings further said that the expected shift in awarding preference from engineering, procurement and construction (EPC) to hybrid annuity model (HAM) and toll projects in the medium term will lead to 25-30% reduction in the share of EPC projects going forward. “This shall also help in reducing the funding requirement for NHAI while focusing on the quality of construction,” it added.As per the rating agency, under the revised toll concessions also, the 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.

According to the CareEdge Ratings, build-operate-transfer (BOT) and hybrid annuity model (HAM) remained the preferred mode of award constituting around 55% of the total projects awarded in the road sector during FY21-FY24.

“We have 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 delays ranging from four-six months beyond the grace period of three months,” it said.

“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 for more than a year as compared to Rs14,500 crore as of June 30, 2023,” it added.

“As project complexities rise and timelines elongate, it is imperative to swiftly address bottlenecks thus ensuring seamless infrastructure development,” Maulesh Desai, director, CareEdge Ratings said.

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