Out of the 26 hybrid annuity model projects awarded this fiscal, about four-five may get scrapped due to inability of the developer to invest equity or bring in debt
Some of the road projects under the new hybrid annuity
model (HAM) that attracted aggressive bidding this fiscal year are struggling
to achieve financial closure as banks remain cautious, developers and analysts
said.
Under HAM, the government commits up to 40% of the project
cost over a period and hands the project to the developer. The developer has to
fund the balance with debt and equity, and is paid annuity income in
instalments. The model was designed to make it safe for banks and investors.
Satish Parakh, managing director at roads developer Ashoka
Buildcon Ltd, said some lenders are “not happy” with the hybrid annuity model.
“Some of the banks are refusing to finance on the basis of those documents, and
only a few banks are coming forward for the hybrid annuity model. They have
some reservations which they are discussing with the NHAI. The other part is
that some companies are finding it difficult to put equity,” said Parakh said.
He added the company had achieved financial closure of its HAM project.
Like all public-private-partnership (PPP) projects, HAM
projects too are facing issues with financial closure, said K. Ramchand,
managing director, IL&FS Transportation Networks Ltd (ITNL). ITNL, which
has the largest portfolio of build, operate and transfer (BOT) road projects,
has bid for HAM projects in various states but not announced a win so far.
Out of the 26 HAM projects awarded this fiscal, about
four-five could get scrapped due to inability of the developer to invest equity
or bring in debt, said an analyst, asking not to be named as he is not
authorized to speak to reporters. Large banks such as State Bank of India (SBI)
and Axis Bank are selectively funding HAM projects even as many companies
continue to bid for and win such projects, according to this analyst. SBI and
Axis Bank did not respond to email queries sent on Thursday.
“Earlier, banks were slightly reluctant with funding hybrid
annuity projects, especially for developers with weak balance sheets and lack
of construction experience. They (banks) were taking longer time than usual to
assess HAM projects as they wanted to understand the new business model.
However, in the recent weeks, a lot of companies including Welspun, MEP Infra
and Sadbhav have been able to achieve financial closure for their hybrid
annuity projects,” said IIFL Wealth analyst Alok Deora.
On 2 December, Deora had said in a report that certain
small developers had failed to receive financial closure for their HAM
projects, which were consequently cancelled.
The government’s push for new low-risk HAM awards to
kick-start private sector investments has led to the emergence of a number of
smaller, regional companies that have added to the sector’s competitive
intensity, according to road developers and analysts. The increase in awards of
projects under the government-funded engineering, procurement, and construction
(EPC) model too has driven up bidding aggression.
Companies including Sadbhav Infrastructure Projects Ltd,
Welspun Enterprises Ltd, and Ashoka Buildcon have been able to tie up loans and
submit their financial closure details to NHAI. MEP Infrastructure Developers
Ltd has been able to achieve financial closure for two of its projects with two
others yet to be closed, while PNC Infratech Ltd and Dilip Buildcon Ltd are
expecting to achieve financial closure by March. Some other companies such as
MBL Infrastructures Ltd, APCO Infratech Pvt. Ltd, Oriental Structural Engineers
Pvt. Ltd and GR Infraprojects Ltd, are yet to achieve financial closure of their
won projects, according to channel checks of the firms.
“A concern in the roads sector today is that there is huge
aggression even though the number of players is less. The job being bid out are
quite large, but theirs is no comfortable participation and instead, there is a
lot of aggression. And that will lead to execution challenges,” Ashoka
Buildcon’s Parakh said.
Road projects in India have always been awarded in one of
the three formats—BOT annuity, BOT toll and EPC. In BOT annuity, a developer
builds a highway, operates it for a specified duration and transfers it to the
government, which pays the developer annuity over the concession period. Under
BOT toll, a concessionaire generates revenue from the toll levied on vehicles
using a road. In EPC, the developer builds with government money.
India has set a target to award 25,000km of road projects
in FY17 under the ministry of road transport and highways and National Highway
Authority of India (NHAI), compared to 10,000km achieved in FY16.
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