The Hybrid Annuity Model (HAM) for highway projects that insulates private developers from virtually any commercial risks, is putting stress on the highly-leveraged balance sheet of the National Highways Authority of India (NHAI), and should therefore be ‘downplayed’.
The Hybrid Annuity Model (HAM) for highway projects that insulates private developers from virtually any commercial risks, is putting stress on the highly-leveraged balance sheet of the National Highways Authority of India (NHAI), and should therefore be ‘downplayed’, a government-appointed task force has opined.
Launched in 2016, HAM caught the fancy of developers – as it requires them to have very little skin in the game, sub-10% practically – and has been the sole channel for private investments in the sector in the FY17-FY20 period. The sustainability of the model has been questioned by lenders which have become increasingly averse to funding HAM projects.
The NHAI awarded 55% of its projects through HAM in 2016-17, which gradually fell to just 28% in 2019-20. The NHAI will look at the market contribution to determine its target for awards in 2020-21 and the routes to be taken, officials said. The total debt of the authority was Rs 1.8 lakh crore as on March 2019, which, according to analysts, might surge to Rs 3.31 lakh crore by FY23.
The task force on National Infrastructure Pipeline (NIP) said: “The need is also to downplay HAM as it has adversely impacted BOT (toll) concessioning and financial health of the NHAI”. It estimated that nearly one in five rupees of the estimated investment of Rs 111 lakh crore in the infrastructure sector would be invested in the roads sector in the next five years.
Under HAM, the NHAI bears 40% of the project cost upfront and the remaining 60% goes to the developer over a period of 15 years. The developer, therefore, needs to find money for 60% of construction cost at the initial stage and his equity share turns out to be less than 10% over the project life in most of the cases.
Increased risk aversion among a pool of investors, lenders’ chariness, issues related to last-mile land acquisition and cash flow problems of operational projects brought awards through HAM to zilch till the April-December period of the last fiscal.
According to rating agency ICRA, 116 HAM projects, measuring 6,388 km and involving an investment of Rs 1.39 lakh corre are at different stages of completion. Banks have around Rs 62,000-crore exposures to such projects.
A lot of projects have been announced through HAM, but financial closure is not happening because of reasons related to the NBFC crisis. Also, many companies have taken more projects than they can complete, BK Goenka, Assocham president, recently told FE.
Goenka’s company Welspun executed the first HAM project in the country. The stress in the highway sector has led to virtual cessation of the BOT-Toll model, where the developer collects toll to recoup investments and therefore bears the real business risk. Under the EPC model, the project cost is completely borne by the government. Higher reliance on EPC would mean increased financial burden on the exchequer.
If HAM goes, it would be none out there to invest in highway projects, except the government. The private sector currently has no bandwidth to put in 60% of the project cost up for recovery in the next 15 years. Nonetheless, it’s good to see policymakers are recognising the reality as it exists today,” said Vinayak Chatterjee, chairman of Feedback Infra.
ICRA’s Rajeshwar Burla, however, is not in favour of downplaying HAM since “the transportation sector is undergoing transformational change with alternate modes viz. dedicated freight corridor and inland waterways, which would result in a modal shift from road to these modes over the medium to long term. In addition, the road network itself is undergoing significant changes with some of the economic corridors under Bharatmala competing with few existing stretches.” Overall, he said, these factors would make the traffic forecasting extremely challenging. Therefore, the BOT (toll) model in its current form might not have many takers, he feels. Achieving financial closure also would be a challenge given these uncertainties.
As far as private investors are concerned, cash flow issues have emerged for operational HAM projects owing to the recent reduction in bank rate. This has reduced their appetite for new projects. CARE Ratings wrote recently: “During operational phase, cash flow is assured (for HAM projects) in the form of annuity payments from NHAI on a semi-annual basis covering 60% of the inflation-indexed completion cost along with interest at bank rate plus 3% that is, 8.65% as in September 2019… Nevertheless, bank rate steadily declined from 6.75% in January 2019 to 5.65% as in September 2019 without corresponding reduction in cost of borrowing, which is expected to moderate the cash flow cushion of operational HAM projects.”
Burla suggests: “It is time to devise a new model on the lines of BOT (HAM) to reduce the upfront equity contribution for private developers to an extent. Till then, it is best for the NHAI to focus on asset monetisation (both TOT and InvIT) and redeploy those funds in new highway development. Any tweaks to mode of awarding without addressing the problems would jeopardise the overall project awarding process and would further delay the Bharatmala programme which is already delayed.”
In the Budget for 2020-21, the NHAI has been given budgetary support of Rs 42,500 crore, up from Rs 36,391 crore (revised estimate) in 2019-20. It has also been given an approval to raise Rs 65,000 crore from the market, down from Rs 75,000 crore in 2019-20. Asset monetisation, which has been pegged at Rs 10,250 crore for 2020-21, is critical for the NHAI to meet its construction targets.