Lenders welcome hybrid annuity model for NHAI projects, but other options could lessen burden on govt
Going by recent trends, it is likely that NHAI is going to continue rolling out more HAM projects, and the upsurge and the confidence of investors in the roads sector are going to persist.
IRB Infrastructure Developers Ltd (IRB), the largest highways infrastructure developers in the country, bagged its third successive project from the National Highway Authority of India NHAI under Hybrid Annuity Model (HAM) in the state of Gujarat.
As per reports, until December 2017, 48 road projects had been awarded to concessionaires under the HAM by the NHAI with effective length of around 12,000 km and bid project cost of Rs 49,000 crore. Out of these, more than 40 projects with an aggregate bid project cost of Rs 43,500 crore have already achieved a financial closure.
Until very recently, however, the road sector did not quite present such a rosy picture. In fact, between 2012 to 2016, the once-hyped road sector was facing a severe liquidity crunch leading to stranding of many under-construction projects. At the same time, developers were getting spooked because of severe losses in collection of toll, and political pressures in toll collection. What was required was a fresh impetus to rejuvenate and revive investments in road projects. Nitin Gadkari, the Minister of Road, Transport and Highways (MoRTH) sought to do this by introducing HAM in early 2016 as a new mode of delivery of highway projects through the public private partnership (PPP) route.
To be sure, HAM was not entirely a novel concept, but as the name suggests, it was conceived as a hybrid or combination of the already existing Engineering Procurement and Construction (EPC) and Build Operate Transfer – Annuity (BOT Annuity) models. HAM was introduced when it was realised that only relying on EPC and BOT-Annuity models would not be financially viable for the government in the long run. Additionally, other PPP models like the BOT-Toll model had also stopped attracting bids due to inadequacies in toll collection and inability of the developers to arrange such significant amounts of investment either in the form of debt or equity.
NHAI provides 100 percent support by annuity payments over the concession period without any toll collection responsibility. In the hybrid annuity model, NHAI provides the concessionaire 40 percent of the project cost payable in five equal instalments linked to the physical progress of the project. The remaining 60 percent of the project cost is borne by the concessionaire by a mix of debt and equity that is recoverable by the concessionaire as semi-annual annuity payments. Additionally, NHAI is required to make O&M payments to the concessionaire, and release advance payments not exceeding 10 percent of the project cost. Therefore, by introducing HAM the Government has significantly reduced the financial burden on the concessionaire during the construction phase, and de-linked the concessionaire from any traffic risk by taking on the toll/revenue collection risk on itself. While the NHAI does take on the toll collection risk, commissioning these roads creates political goodwill and is a positive social change.
At the time the HAM was proposed, lenders had voiced significant concerns on the bankability of projects under this model; the biggest concern being the ability of the government to fund the upfront 40 percent of the project cost of all roads and the semi-annual annuity payments thereafter. Lenders were also initially circumspect about the lack of adequate promoter participation in these projects, considering that two-thirds of the 60 percent project cost are likely to be brought in by loans, thus leaving only about 20-25 percent of the entire project cost to brought in by the promoters as equity. However, as the data suggests, lenders and investors have both been very receptive towards HAM, and this is now seen as a win-win for both the government and the private players.
Apart from the positive attributes of HAM, this is also due to NHAI’s healthy balance sheet which translates into lenders and developers being confident of NHAI’s ability to honour its financial commitments, linkage of the concession period under HAM to the commercial operations date (and not the appointed date), thus de-linking construction and land acquisition delays. Since the equity infusion by the promoters is minimised, stranding of projects due to non-availability of funds becomes less likely.
Going by recent trends, it is likely that NHAI is going to continue rolling out more HAM projects, and the upsurge and the confidence of investors in the roads sector are going to persist. Having said that, the government must be mindful that the HAM imposes a significant financial burden on NHAI and other viable models for developing road projects (such as the recently introduced toll operate transfer (TOT model), wherein completed road projects will be bid out to selected participants for a period of 30 years in return of an upfront concession fee) must be encouraged.
(The writer is Associate Partner, Khaitan & Co)
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