No one wants to invest in highway projects? No project awarded under Hybrid Annuity Model this fiscal

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Published: October 31, 2019 1:02:28 PM

With HAM awards down to zilch, the government and the National Highways Authority of India seem to have come full circle and poised to rely entirely on the conventional engineering, procurement and construction (EPC) model for the time being.

As reported by FE earlier, highway project awards in the April-September period of the current fiscal were just 2,103 km. As reported by FE earlier, highway project awards in the April-September period of the current fiscal were just 2,103 km.

There is no one out there to invest in highway projects, except the government. Increased risk aversion among a pool of investors that has anyway been limited, lenders’ chariness, issues related to last-mile land acquisition and cash flow problems of operational projects have all resulted in a drying up of new hybrid annuity model (HAM) projects. Not a single highway project has been awarded under HAM this fiscal, official sources said, sharply down from its 40% share in awards in FY19 (see chart).

Though HAM allows private investors to have very little skin in the game — sub-10% practically —, this has been the sole channel for private investments in the sector in FY17-FY19, after the stress in the sector led to virtual cessation of the BOT-Toll model, where the developer collects tolls to recoup investments and therefore, bears real business risk.

With HAM awards down to zilch, the government and the National Highways Authority of India seem to have come full circle and poised to rely entirely on the conventional engineering, procurement and construction (EPC) model for the time being.

Under the EPC model, the project cost is completely borne by the government. Of course, this would mean increased financial burden on the exchequer, as the Narendra Modi government is committed to maintain the relatively high pace of highway construction it has achieved over the previous regime.

No one wants to invest in highway projects? No project awarded under Hybrid Annuity Model this fiscal

Under HAM, the NHAI pays 40% of the project cost upfront and remaining 60% over a period of 15 years to the developer; the developer, therefore, needs to find money for the 60% construction cost at the initial stage and his equity share turns out to be less than 10% in most cases.

On their part, banks have turned wary of HAM due to the very low equity contribution by developers. 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 the 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 on September 2019…. Nevertheless, bank rate steadily declined from 6.75% in January 2019 to 5.65% as on September 2019 without corresponding reduction in cost of borrowing, which is expected to moderate tye cash flow cushion of operational HAM projects.”

In FY19, the projects awarded through HAM slowed down to around 834 km of the overall 2,222 kms of projects awarded by NHAI. This is majorly due to delays in Right of Way (land acquisition) and financial tie-ups, India Ratings had said, adding that the appetite of the private players reduced due to a large number of HAM projects that were on offer in FY18-FY19.

No one wants to invest in highway projects? No project awarded under Hybrid Annuity Model this fiscal

“A lot of projects have been announced through HAM, but financial closure is not happening because of the reasons related to NBFC crisis. Also, many companies have taken more projects than they can complete. Hence, the L1 criteria for selection of developer has to be changed and the bidder’s ability to raise finances and complete projects, as assessed on the basis of his track record, has to be factored in,” said BK Goenka, president, Assocham. He added that out of 130 projects awarded through HAM, so far, 54 have not got financial closure. Goenka’s company Welspun executed the first HAM project in the country.

As reported by FE earlier, highway project awards in the April-September period of the current fiscal were just 2,103 km. Though this was still higher than projects of 1,698 km awarded in the first half of the last fiscal, the H1FY19 performance looked unimpressive compared with awards of 4,482 km in the first half of FY15, a period that immediately followed assumption of office by the first Narendra Modi government.

Even in the EPC segment, lower-than-required budgetary support and the NHAI’s funds constraints are impacting the project awards. In fact, the awards had plunged to its lowest in three years to just 1,367 km during the April-August period of the current financial year. There was some pick up in September.

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