Hybrid Annuity Model makes inroads into BOT projects

August 9, 2016

Road builders who have shown an interest in the new hybrid annuity model (HAM) to build roads are making a killing with profit margins in excess of 20%. This compares much more favourably to even build, operate, transfer BOT) projects where margins usually range between 16-18%. Rohan Suryavanshi, Head, Planning and Strategy, Dilip Buildcon, said, “Yes, the margins are good, with respect to the projects we have bagged so far under the new model.”   “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 usually done 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 the 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%.”   So far, the bigger and more experienced companies have not yet bid for these projects. Shailesh Sawa, Director, Business Development & Strategy, Essar Projects, said, “We are open to considering various options if the project is promising, with a reasonable risk profile and good returns.” Sawa added that he is evaluating a number of upcoming highway projects that are being tendered on the EPC mode. Sudhir Hoshing, Joint Managing Director, IRB Infrastructure, said that 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 one among the new players bidding for HAM projects and 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. However, another CEO of a leading road developer said 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 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 instalments, based on the targeted completion of the road project. The remaining 60% balance 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.

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