Innovative Risk Management: Credit Ratings Reshape the Road Sector Bidding Landscape

As an insurance broker, we understand the importance of managing risks in any sector, and the road construction industry is no exception. Recently, the Indian government has introduced a new requirement for road projects, specifically the hybrid annuity model (HAM) and build-operate-transfer (BOT) toll road projects. Under the new rule, bidders for these projects must have a minimum credit rating of 'BBB'. This is important because HAM is expected to be a major mode for awarding road projects in the future. It is a positive development for the sector, as it will help to minimize risks associated with project implementation and defaults by developers.

There are many risks associated with under-construction BOT road projects, including delays in securing right of way and Ministry of Environment and Forest clearances, as well as funding and interest rate risks. The likelihood of these risks leading to cost and time overruns, and even defaults by developers, is high. This can be a big problem for the sector. Many large developers with healthy credit ratings have either won projects at sub-optimal premiums or refrained from bidding altogether to protect their margins. As a result, the bid premiums for projects across most credit rating categories have fallen. The government's new initiative is aimed at minimizing risks associated with project implementation and defaults by developers. If implemented successfully, this move could significantly improve the risk profile of the sector.

At PINC Insurance , we believe that the government's new initiative is a step in the right direction towards creating a more stable and reliable road sector. By setting a minimum credit rating requirement for bidders of HAM and BOT toll road projects, the government is encouraging healthy competition and ensuring that the most qualified bidders win the contracts. This move will not only help to mitigate risks associated with project execution and funding, but it will also provide greater assurance to developers, investors, and all other stakeholders involved in the sector.

As an insurance broker, we look forward to working with our clients to help them manage risks associated with their road construction projects and ensure their success.

Source: https://www.crisil.com/content/dam/crisil/our-analysis/views-and-commentaries/sectorvector/2023/04/rising-from-the-bbb-floor.pdf

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