Road development projects, that are bagged through the Hybrid Annuity Model (HAM) route, are not favouring small road developers even as they seek to transition into a new business area.

In 2016, the Government came up with HAM. A the name suggests, HAM’s a hybrid — a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. The logic was the developer puts in 60 per cent of the cost and the government (NHAI) funds 40 per cent, based on milestones achieved.

CRISIL pointed out that while large developers, with a turnover of over Rs 1,500 crore have had lesser problems in achieving financial closures (for projects), the story was different for small developers. The smaller developers, many of which have morphed from engineering, procurement and execution (EPC) projects to HAM, for the first time, are struggling to secure funding after bidding aggressively and banks tightening capital requirements, CRISIL noted. As per the model concession agreement, HAM projects must achieve financial closure within 150 days of signing the concession agreement.

The National Highways Authority of India (NHAI) has awarded 6,670 km under 119 HAM projects between fiscal 2016 and fiscal 2019. This accounts for 35-40 per cent of the 18,000-18,500 km of road projects awarded by the NHAI during this period. About 18 large players accounted for 75-80 per cent of the 6,670 km awarded between fiscal year 2016 and 2019, while 15-17 small players accounted for the rest, according to CRISIL.

Since many small players are entering the HAM segment for the first time, they have started to bid aggressively, industry watchers opine. CRISIL Research’s analysis shows that around 40 per cent of the projects bid by them were priced 10 per cent below the lowest tender or L1-NHAI cost. In contrast, the price of most projects bid by large players was 10 per cent higher.

Around 2,540 km of awarded HAM projects awaiting appointed date

Moreover, over 60 per cent of the small players achieved financial closure at a debt-equity ratio of less than three times, while around 60 per cent of the large players’ projects did so with a debt-equity ratio of more than three times. This indicates that banks want small players to bring in a higher amount of equity capital to ensure project viability, noted CRISIL. Incidentally, a majority of the new players operated in the EPC space earlier

Small developers also had to contend with another development, which added to their woes. While almost all the HAM projects awarded in fiscal year 2016 and 2017 had achieved financial closure, the numbers have hit the pause button. Only 70-75 per cent of the length awarded during fiscals 2016-2019 has achieved financial closure to date. The slippage occurred largely in fiscal 2018, while the projects awarded in fiscal 2019 –typically awarded in the last quarter of the year –are due for financial closure now, CRISIL noted. Additionally, while 75-80 per cent of the projects awarded to large players during this period achieved financial closure, for small players it was lower at 65-70 per cent.

Besides, delays in receiving the appointed date –or the starting date of a project when the NHAI hands over a contract letter to the developer have worsened. About 4,130 km of the 6,670 km (60-65 per cent) of HAM projects awarded so far have received appointed dates. The average delay in receipt of appointed date is 5-6 months.

Around 2,540 km of the 6,670 km of awarded HAM projects are awaiting the appointed date. And over 60-65 per cent of the 2,540 km runs the risk of termination since the wait has exceeded 18 months, said CRISIL.

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