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Road project awards in India going the HAM way - Citi Research

Infra News - Published on Thu, 12 Jul 2018

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BloombergQuint reported that road projects awarded under the hybrid annuity model, where the government and the developer share the costs, rose nearly tenfold in two years, according to Citi Research. Project length awarded under hybrid annuity model increased from 345 kilometres to 3,396 kilometres in two years through March 2018.

The HAM, launched by Union Transport Minister Mr Nitin Gadkari in January 2016, competes with two other models.

Here’s how the three differ:
Under build-operate-transfer, a developer foots the entire bill to build a project, recovers cost over a period and then transfers it to the government;
Engineering-procurement-construction is where the government pays a company to lay roads.
HAM is a combination of the two. State-run Nation Highway Authority of India releases 40 per cent of the project cost in tranches. The remainder is arranged by the developer, who also receives semi-annual annuities during the project’s operation and maintenance.

Credit Suisse said that HAM projects are won at costs that are 20 percent higher than NHAI’s project estimates. That leads to a strong return potential as the interest cost for deferred payment is only 3 percent.

The NHAI awarded road orders worth INR 75,600 crore under HAM in the year ended March compared with the INR 31,200 crore cumulatively under the other two models.

Mr Rohan Suryavanshi, head of strategy and planning at Dilip Buildcon, said that “Hybrid annuity models have helped debt equity requirements in the industry. There’s also a sovereign guarantee from the government when it comes to the annuity payments, thus helping the road construction companies to be insulated from regulatory and economic shocks.”

Mr Suryavanshi said though the volatility of returns is low, execution of projects remains a concern. Nomura too strikes a note of caution.

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Posted By : Nanda Koijam on Thu, 12 Jul 2018
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