Many hybrid annuity road projects achieve financial closure

HAM projects are ones in which govt pumps in up to 40% of the total cost of the project

At a time when bankers are wary of financing hybrid annuity road projects, mid-sized companies have achieved financial closure under this mode.

The National Highways Authority of India (NHAI) and the road ministry are of the view that the de-risking aspect in hybrid annuity model (HAM) projects is higher than in build-own-operate (BOT) contracts and hence, funding is not an issue.

HAM projects are ones in which the government pumps in up to 40% of the total cost of the project.

According to an official, of the 26 HAM projects awarded so far, 17 have tied up funds. He added that with this kind of response the share of HAM projects would increase in contracts for 2017-18.

“We have cleared financial closure for four of our projects and will be completing closure for the fifth one by April-May. Issues related to financial closure may be individual in nature or related to the parent company’s balance sheet if bids are aggressive,” said Vasistha C Patel, managing director, Sadbhav Infrastructure Project. Patel added no changes were needed to make these projects attractive.

MEP Infrastructure Developers is another company that has achieved financial closure for its five HAM projects. “MEP is likely to achieve financial closure of its sixth HAM project very soon, making it the only infrastructure player to have achieved financial closure for all its HAM projects,” said Jayant Mhaiskar, vice-chairman and managing director, MEP Infrastructure Developers. MEP has an order book of Rs 3,836.99 crore with six projects in the HAM segment.

Of the total 50 highway contracts awarded in the current financial year till January 31, 2017, HAM projects constituted 36%.

Experts have views similar to those of the road ministry and the NHAI.

“All concerns expressed by banks vis-à-vis the BOT model have been factored in under the hybrid model. As the total project cost is the bid parameter, the issue of underestimation of costs by the authority will not arise,” said an expert.

The NHAI is yet to firm up highway targets for 2017-18 but sources said HAM and EPC (engineering, procurement and construction) contracts would constitute 40% each of the total projects during the year followed by 20% BOT projects.

According to Vishwas Udgirkar, partner and leader, government utilities, infrastructure development, at consulting firm Deloitte Touche Tohmatsu India, HAM projects require less financing than the traditional annuity model and interest rate risks are absorbed by the NHAI.

There were reports that concessionaires were struggling to find financiers for HAM projects as the percentage of equity held by companies in such projects is lower than that in BOT projects. Hence banks were reluctant to provide loans for such contracts.

“When compared with BOT projects, under the HAM structure, the revenue risk of toll collection and risks related to financing the project (40% of the project cost, and inflation and interest rate risks) are borne by the NHAI,” said Bhavik Damodar, partner, infrastructure and government services, KPMG India.

On the attractiveness of HAM projects, Devam Modi, analyst, Equirus Capital, said in a report, “With 17% higher bid project cost than the authority estimated cost, 5% median NPV variation between L1 and L2, and limited participation of 4-5 bidders in most projects, the competition has been healthy. We expect the winners to manage respectable Ebitda (earnings before interest, tax, depreciation and amortisation) margins as well as project IRRs.”