There has been an increase in the number of projects awarded under the recently introduced hybrid annuity model (HAM) in the roads sector since March.
Twenty-one projects have been awarded since then, with five of them in June and four in May. This compares with just one highway project awarded in late December last year and no project in January and February this year.
Since the ministry of road transport and highways does not publish any data on the number of projects awarded, unofficial estimates indicate that about 3,000 km were awarded since April, with roughly 1,000 km falling under the new model.
Projects awarded under the build, operate and transfer (BOT) model were negligible, while the rest was under the engineering, procurement and construction (EPC) model.
Projects under the HAM were keenly contested as there were seven to eight bidders in the fray for every project, according to a report by Jefferies. Sudhir Hoshing, joint managing director, IRB Infrastructure, said since this was a new model, a new category of players is emerging. “The bidding has already become very competitive. We’ll wait and see how this plays out.”
MEP Infrastructure is among new players which has bagged about six projects under the new model. Analysts believe that this sort of interest to become first-time asset owners is representative of a greater enthusiasm among new and smaller companies.
The Jefferies report also pointed out that with some of the relatively larger developers adopting a wait-and-watch approach so far as the new model is concerned, bidding for projects has not yet become very aggressive. As a result, early bidders are making a killing with a return on equity of more than 20%. This is extremely high compared to even BOT projects that have margins ranging between 14% and 16%.
“Most of the companies are building in their margins during the construction phase into the project cost itself, resulting in high internal rate of return on equity,” an analyst explained.
While this is not a standard practice in EPC contracts, the fact that HAM is a new model with lesser numbers of bidders in the fray (compared to EPC projects) has resulted in some opportunistic bidding with companies building in extra margins into the cost of the project.
However, said an analyst, “Prima facie, the equity returns are about 10% or so which is what the government has intended with this model. But, obviously, no player is going to put in equity to earn just 10%.”
Bigger and more experienced players have not yet bid for these projects. “We are open to considering various options if the project is promising, with a reasonable risk profile and good returns,” said Shailesh Sawa, director, business development & strategy, Essar
Projects. Sawa said he is evaluating a number of upcoming highways’ projects that are being tendered on the EPC mode.
The CEO of another leading road developer told FE that he was apprehensive of certain clauses in the new model. “Where the HAM agreement really fails is in ensuring a clear and unwavering definition of the revenue stream for the project. The revenue stream is subject to too many potential adjustments along the way, both during construction and O&M periods. These concerns affect the sanctity of the revenue stream and destroy the element of certainty normally expected and associated with an annuity model,” he said, asking not to be identified.
The National Highways Authority of India has published a list of 6,600 km it intends to award this year, and the ministry, too, is working on a complete list of projects it intends to award to achieve the overall target of 25,000 km for FY17. Of the total, the ministry has a stated intent to award 85-90% of projects under HAM and EPC, skewed heavily towards the former.
The HAM was conceived to moderate risks faced by highway developers and provide financial support during construction. Projects under this model were slow to take off with the first few projects seeing just two-three bidders and roughly 400 km being awarded since the model was approved by the Cabinet Committee on Economic Affairs in January this year.
Under this model, 40% of the project cost is provided by the government as construction support to the developer in five equal installments, based on the targeted completion of the road project. The balance 60% is provided as annuity payments over the concession period. The toll is collected by the government, relieving the developer of this politically sensitive issue.
In such projects, developers are also offered 80% prior land acquisition and forest clearances. The model was first proposed by the Road Transport and Highways Ministry in February 2015 and it came into effect exactly a year later.