By Ananya Singh
The roadways industry has been languishing owing to problems of missed deadlines, debt, and stalled projects. Low investor confidence and poor private player involvement only exacerbate the condition. The government, keen on increasing public-private partnerships (PPP model), introduced the Hybrid-Annuity Model (HAM).
Highways construction is a primary aspect of every political manifesto as it heralds the idea of development and progress like no other. The HAM model has augured success for the government by ensuring timely completion, better margins, and increased infrastructure-based PPP projects. Further, reduced financial risk, streamlined process of land acquisition and faster disbursement of funds have all been made possible by adopting the HAM Model.
What is HAM?
Introduced in 2016 by Nitin Gadkari, Road Transport and Highways Minister, the Hybrid-Annuity Model (HAM) for roadways has proved successful in its aim of boosting investments in infrastructural development and increasing involvement of private players.
Before HAM, contracts and tenders for road and highway construction were based on EPC (engineering, procurement and construction) and BoT (build, operate and transfer) models. HAM serves the purpose of combining the two to boost investor confidence.
Differentiating among EPC, BoT, and HAM
Under EPC, the government bears the complete cost of construction, including sourcing raw materials. The National Highway Authority of India pays private players to build the highway. In this model of PPP Project, the role of private players is minimal. Responsibilities of revenue collection and maintenance fall upon the government once the construction is complete.
Under BoT model, the private player builds, operates and looks after maintenance for an approved time period before the transfer of the infrastructure to the government. As such, the private player is more active in the BoT model as compared to EPC. The government pays the developer a predetermined annuity fee for the construction and maintenance.
HAM combines the two models in the ratio of 40 percent EPC and 60 percent BoT. NHAI will disburse 40 percent of the cost of the project during the construction period while the remaining 60 percent will be raised by the developer. The first 40 percent is paid in fixed amounts in five equal instalments. The government then pays the 60 percent raised by the developer as annuity, depending upon the value of the asset once the construction is complete. NHAI alone bears the responsibility of revenue collection through tolls.
Advantages of the model
Dispersal of financial risk between the government and private players is a primary advantage of the HAM model. Such a model seems most fruitful for speeding up stalled projects where the BoT model cannot be applied.
HAM further reduces heavy dependence on banks for loans as private players can raise the required amount from equity. This helps reduce the proportion of debt and further reduces the risks banks take for non-performing assets (NPA) with longer maturation periods.
The annuity payment allows developers to recover their costs. It proves more lucrative for private players than the BoT model as they do not have to bear the responsibility of revenue collection and hence, bear the risk of low traffic. The government, in turn, bears the ‘traffic risk’. However, this is offset by the ‘social returns’ through easy access to daily commuters.
Faster funds disbursement
A change in the financial framework of HAM model has enabled faster disbursement of funds and timely completion of projects. By completing projects within the stipulated time period, developers are able to reduce their construction costs including machinery and labour charges to a great extent. The interest to be paid to lenders during construction is also reduced.
Funds or the lack thereof is a major obstacle for infrastructure projects. Timely disbursement is important if construction is to be completed on time. With the HAM Model, the government has to bear only 40 percent of the construction cost, to be paid in five equal instalments over a fixed period. As reported in Business Standard, an official stated, “Since fund disbursement from the government is on time and happens during the construction phase itself, projects do not get stuck because of financing reasons.”
Till now, 14 HAM contracts have been given for construction of 754 km of highways, costing ?169 billion. These include certain prominent projects like the Somnath-Jetpur, Saharanpur-Yamunanagar, and Delhi-Meerut Expressway.
Streamlining land acquisition process
Highway projects suffer various hindrances. Primary among these is the issue of land acquisition. Earlier, the procedures and legalities associated with acquiring private land upon which the highway is to pass would take an inordinate amount of time. To resolve this issue, compensation under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2015 was increased. As reported in Business Today, it went up from 1.35 crore per hectare in 2014-15 to nearly two crores per hectare the next year.
The government has also made efforts to appoint Competent Authority for Land Acquisition (CALA) along with setting up special units in concerned ministries, NHAI and local offices. Guidelines were issued that allowed projects to begin construction only upon realising the acquisition of 90 percent of the land.
These guidelines streamline the construction and allow for timely completion by avoiding unnecessary time wastage on legal procedures and construction roadblocks due to legal matters.
Willingness of banks to lend
Before the introduction of the HAM model, the roadways industry was rapidly spiralling downwards. While during 2010-12, projects of more than 20,000 km were awarded, most were stayed due to lack of adequate planning. The pace of highway construction had slowed to only 12 km per day. Private players did not find it profitable to enter roadways and highways development, and the industry was characterised by falling investor confidence and reluctance on the part of banks to lend for development projects. HAM model reduced the financial risks attached to such projects, making the field more lucrative for public-private partnerships.
Jayant Mhaiskar, Vice-Chairman and Managing Director, MEP Infrastructure Developers, said that lenders initially were unclear on various aspects of the model. “Over the last one year the authorities have addressed and clarified those issues, which gave an impetus to the banks, and so, multiple financial closures have been achieved.” Minimising the equity investment from the developer’s side has greatly resolved the problem of financial risk. The 60 percent construction cost to be raised by developers is paid to them by the government as annuity from the date of project commission.
Arun Lakhani, Chairman and Managing Director, Vishvaraj Infrastructure Ltd. said, “The switch from BoT to HAM has helped developers and is a big comfort for bankers. In the BoT model, traffic estimation and future projections were critical. Banks were not comfortable with this due to the possibility of an alternative route materialising. In HAM, the traffic risk is taken away from the entrepreneur, making it safer for bankers.” As such, while banks were earlier in two minds about investing in such projects, they have recently become more welcoming to the same.
The various changes in the framework to make HAM model projects more lucrative for investors and the private sector have helped bring banks on board. As Vijay Kumar, Associate Director of India Ratings and Research said: “Bankers are warming up to this type of projects and the award rate from NHAI should pick up in the coming days as they have now tested the model.”
Featured Image Source: Pexels
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