Recent policy recalibrations are reshaping the hybrid annuity model, a distinctly Indian innovation in public-private partnership for road infrastructure. These changes aim to ensure that financially sound and technically qualified developers take the lead, setting the stage for higher construction standards and a more balanced distribution of national highway projects, says Anand Kulkarni.
National highways are the backbone of India’s logistics network. While they form less than 3 per cent of the total road network of the country, they carry around half of the total road traffic. Expansion of the national highway network is essential for improving logistics efficiency. To this end, the government has awarded projects under various modes of the public-private partnership (PPP).
In this endeavour, the hybrid annuity model (HAM) has played a pivotal role, accounting for a sizeable share of project awards and helping attract private investment. While execution of these projects largely remains timely till now, bidding aggression seen in the recent past may have a bearing on some projects going forward. Having said that, timely interventions by the government will likely reduce such instances and ensure that the model continues to drive sectoral growth.
To provide some context, between 2007 and 2014, awarding of national highway projects was primarily done through the build-operate-transfer (BOT) toll route. However, these projects were marred by construction delays and significant deviations in traffic estimates once operational, resulting in stress on the finances of developers. This resulted in developers and lenders largely shying away from the BOT toll mode.
Introduction of HAM in 2016 was, therefore, aimed at resolving these problems and
bringing developers and lenders back to the table. Under HAM, the government funds
40 per cent of the project cost during the construction phase, while the remaining 60 per cent is paid over 15 years. These payments are only linked to adequate maintenance of the road stretch by the developers and hence mitigate traffic-related risk. HAM also brought in provisions such as the requirement of at least 80 per cent right-of-way (ROW) before the declaration of the appointed date, de-scoping and de-linking of project length where ROW has not been received, and inflation and interest-rate hedging given indexation of cash flow.
Equitable risk distribution
The equitable distribution of risk between the government and private players has been a key driver of HAM’s success. Over the past five fiscals, more than 11,000 km—or around 45-50 per cent of total project awards by the National Highways Authority of India (NHAI)—have been under the HAM. According to Crisil Ratings’ analysis of a pool of nearly 3,100 km of NHAI-awarded HAM projects since 2016, over 75 per cent have either been completed on time or are largely progressing as scheduled. This analysis considers timelines after factoring in approved extensions due to delays not attributable to the developers. Additional extensions may be granted in future for similar reasons.
Following the success of the model, to expand the pool of eligible developers, the Ministry of Road Transport and Highways introduced several relaxations in bidding qualification criteria in FY2021, alongside a reduction in project size. For instance, the minimum net worth threshold was lowered to 15 per cent of the estimated project cost from 25 per cent earlier, while technical qualifications were eased. These measures yielded results, with the average number of bidders per project gradually rising to nearly 15 from around 5 before the relaxations. However, heightened competition and a recent slowdown in project awarding have led to aggressive bidding, with bid premiums slipping into a discount of 10-15 per cent on average by the last fiscal, compared with a premium of 16-20 per cent before FY2021. According to Crisil Intelligence data, national highway awards declined to 8,581 km in FY2024 and 4,874 km in the first 11 months of FY2025, down from an average of 12,553 km per year during FY2022 and FY2023.
Efficiency through stricter provisions
To be sure, the ministry has recognised the perils of aggressive bidding, which can potentially jeopardise the lifecycle cost of projects, and has brought in corrective measures. In May 2022, the ministry removed operations and maintenance (O&M) bids from HAM criteria to discourage unrealistically low quotes aimed at winning contracts.
In August 2022, the ministry reinstated the earnest money deposit requirement and increased the performance security requirement for bids that are more than 20 per cent below the estimated project cost as per the tender. In April 2023, a minimum credit rating requirement of ‘BBB’ was set for bidders for HAM projects. However, these measures had a limited effect on aggressive bidding, as meeting the additional requirements was not a tall hurdle for players.
Then, in April 2025, the ministry enhanced the guidelines around the additional performance security, which will now come into force for bids that are more than 10 per cent below the estimated project cost, and there will be no maximum limit on such security, which was earlier capped at 3 per cent.
The most recent revisions announced on July 10 aim to prevent potential issues by increasing the financial and technical thresholds for eligibility.
The most important revision is the calculation of available net worth for bidding for HAM projects. The minimum available net worth threshold has been increased to 20 per cent of the estimated project cost from 15 per cent earlier. Additionally, the available net worth will now be calculated after deducting
20 per cent of the balance value of existing PPP projects being undertaken by the developer.
Another key change is the increase in the technical qualification threshold for developers. The revised criteria require them to have completed work equivalent to 35 per cent of the estimated project cost of one similar project—like the one they are bidding for—or 25 per cent of two similar projects, compared with the earlier requirement of 20 per cent of one similar project. Additionally, thresholds have been raised for parameters such as the timeline of past execution and the length of roads constructed.
Based on our assessment of 74 developers that won up to 90 per cent of the HAM projects awarded between fiscals 2022 and 2025, and considering the average ticketsize of `90-95 billion for new HAM project awards, the revised qualification criteria of available net worth could potentially prevent around 25 per cent of these players from bidding for new projects in the near term. Another 15-17 per cent of the players would not be able to add more than one project to their order books. This is because multiple projects won by some of these players in the recent past would lead to substantial future commitments vis-à-vis their net worth. It must, however, be noted that as ongoing projects make progress, some of the net worth of the players will be freed up, enabling them to bid for new projects in one to two years.
The recent changes will help ensure that the financial wherewithal of developers is commensurate with the number and size of new HAM projects being bid for, and that they have the appropriate technical know-how. In effect, this should improve the overall construction standards and result in a balanced distribution of projects across players.
Overall, the timely interventions by the ministry will continue to support the enhancement of the country’s national highway network, while safeguarding timeliness and quality.
About the author:
Anand Kulkarni, Director, Crisil Ratings