In the HAM of a Dilemma

Just as with PPP projects, HAM contracts too are finding financial closure to be a challenge. Banks, especially, are wary of putting their money on developers with weak financials and lack of adequate experience. Industry insiders, however, beg to differ.

The Union government approved the hybrid annuity model (HAM) to revive and fast track both investments and projects in the roads & highways sector towards the beginning of 2016. In India, the HAM contract is a combination of built-operate-transfer (BOT) annuity and engineering, procurement and construction (EPC) contracts, with the government subsidising 40 per cent of a project’s cost in the first five years through annuity paid in five equal instalments. The remainder 60 per cent is paid as variable annuity after calculating the total value of assets created and the developer’s overall performance.

For his part, the developer has to raise the balance 60 per cent in the form of equity or loans at the construction stage. Revenue collection through instruments such as toll from the project is the exclusive prerogative of the Ministry of Road Transport and Highways’ (MoRTH)’s nodal agency, the National Highways Authority of India (NHAI).

A few months following the HAM rollout, lenders lsought changes to the model concession agreement (MCA). These included, interest payable by NHAI to be benchmarked to the base rate of State Bank of India or the average base rate of five banks plus a 3 per cent spread, fixing of compensation or termination charges in the eventuality of a concessionaire’s inability to complete a project at 100 per cent of the debt due and non-insistence by NHAI on a guarantee for extending an advance in early stages of construction.

Warns Srishti Ahuja, Director, Transaction Advisory Services, Ernst & Young, ‘The direct repercussion of this negative sentiment is that it will slow down NHAI’s progress in achieving its highway awards target – around 10,000 km of projects expected to be awarded in financial year 2016-17 against the targeted 25,000 km. A natural consequence of this will be that NHAI will give out more projects on EPC basis.’

Traditional Lenders Facing Capital Constraints
Sanjeev Kaushik, Deputy Managing Director, India Infrastructure Finance Company Ltd (IIFCL) attributes this development to traditional lenders such as public sector banks facing capital constraints. Says Kaushik, ‘They have sector saturation in terms of exposure, and also because they have their own capital problems and, therefore, they will not be able to spare so much funds for the infrastructure sector. There is a need for more institutions like IIFCL and IFCI, which are in the nature of development financial institutions. We need more sectoral institutions to fill in the vacuum being created by the retreat of public sector banks from infrastructure.’

It needs to be mentioned here that while NHAI gets 240 days to fulfill precedent conditions such as land acquisition, right of way, etc., developers have to achieve financial closure within 150 days from the award of the project. A report published recently in The Economic Times reported that lenders led by the State Bank of India reportedly conveyed to Nitin Gadkari, Minister for Road Transport & Highways, their apprehensions on financing roads and highways projects under HAM. The lenders also emphasised on hiking the promoter’s or developer’s contribution to the project from between 20 to 25 per cent presently to 40 per cent, with the amount being invested upfront.

This caution on part of the banks could lead to anywhere between 20 to 30 per cent of the 34 HAM projects awarded in the financial year 2016-17 to be abandoned due to the inability of the developer to either invest equity or raise debt. Critics argue that as is the case with the public-private partnership (PPP) model, HAM projects too are finding financial closure to be a challenge. Banks, especially, are wary of putting their money on developers with weak financials and lack of adequate experience.

Onus on NHAI
However, industry insiders attribute problems pertaining to financial closure of contracts signed under HAM more on account of a few developer firms’ own internal problems. They are quick to point out that players with strong financials have not faced any issues on that front. They alleged that NHAI often fails developers in areas such as land acquisition, right of way and timely resolution of contractual issues. There have been cases where projects couldn’t take off despite financing being in place as the agency could not fulfill the precedent conditions in a time-bound manner. Recently, a few senior NHAI officials reportedly admitted in a closed-door meeting with road developers in New Delhi that the deficiency was more on the agency’s part than promoters.

Industry insiders say that concerns raised around funding of BOT and HAM projects are needlessly exaggerated. A senior executive with a developer firm told INFRASTRUCTURE TODAY, ‘As long as you don’t remove hindrances such as challenges on the land acquisition front, projects will continue to get stalled. As far as developers go, a firm that fails to perform on EPC won’t honour BOT or HAM contracts either.’ Ahuja feels that this situation can be resolved through a proactive approach on part of the government and its agencies. She asserts, ‘The only long-term solution is that execution risk will need to be minimised through sustained support on speedy clearances and land acquisition, protecting lenders during the construction period through increase in termination payments, etc., and putting in place strict deterrents for non-performing bid winners.’

In the period April to December 2016, 18 kilometres of roads were built daily, which is still significantly lower than the 41 kilometres proposed by the government. Experts, however, aver that this target might still be achievable by financial year 2018-19 provided there is sustained coordination between government agencies and all relevant approvals are in place at the time of execution of a project.

Meanwhile, on the flip side, the move to provide an impetus to construction of roads & highways through HAM contracts has resulted in several smaller regional players also entering the fray to make the bidding process more vibrant and aggressive. For instance, norms have been made more flexible in a bid to encourage participation by local contractors in the Northeast and other hilly areas of the country.

– MANISH PANT