The hybrid annuity model for building roads conceived by the NDA government in early 2015 seems to have hit a bit of roadblock. To be sure, several projects have been bid out and there is a fair amount of interest among developers. The fact, however, is that a clutch of eleven projects that were awarded prior to March, 31, 2016, are still awaiting financial closure. That’s because lenders—banks and other financial institutions—are not too comfortable with the current set of terms and conditions which they believe are skewed in favour of the developer. To begin with, some of them are concerned the promoter has too small a stake in the venture—an equity contribution of just 9%—which would leave him less than committed to the project. To try and ensure promoters are serious about projects, lenders have suggested the compensation to be paid to them, in the event of a default by the concessionaire, be 90% of the debt due. Right now, the compensation to be paid has been fixed at a much lower level.
Given the myriad problems in the road sector—inability to acquire land, delayed environment clearances, political opposition to toll collection—it is important lenders flag any issues they believe could result in loan defaults. For instance, they have rightly pointed out that the release of funds should match the physical progress of the project. The ministry of road transport and highways (MoRTH) has yielded ground on some of these points and must also give other suggestions a patient hearing. The termination charges or compensation to be paid by the concessionaire, for instance, should not be lower than 90%, given he has been virtually ring-fenced from all risks.
In the hybrid annuity model, it is the NHAI that is shouldering the bulk of the responsibilities—acquiring land, obtaining environment clearances, estimating the traffic and collecting the toll. It is a relatively easy ride for the concessionaire who needs to merely put in 9% of the project cost as equity and earns an annuity for quite a long duration, 15 years post completion. This is precisely why the model was introduced in the first place, the idea being to revive private sector investment in the sector. The pace of awards has been slow so far, with just 1,840 km have been bid out between April and July—well below the 3,158 km in the corresponding period of 2015-16. Unless the ministry is able to get lenders on board, this pace could further moderate. As of now, the 25,000-km target for FY17 looks a stretch.