Banks seem to be warming up to hybrid annuity model (HAM) projects. This model was introduced last year to revive the road sector and reduce the equity burden on stressed developers, analysts and industry players say.

According to an India Ratings and Research (Ind-Ra) report, lenders are gradually familiarising themselves with HAM contracts, although case-specific impediments such as aggressive bids and stressed sponsors continue to delay financial closure for some of the projects.

Construction funding accounts for 40 per cent of the total cost in HAM projects and is released by the National Highways Authority of India in five tranches linked to milestones, while the balance 60 per cent is arranged by the concessionaire. Of this balance, the developer would fund not more than 20-25 per cent and the remaining is raised as debt, the Ind-Ra report notes.

Hence, the equity portion in HAM projects is narrowed down to 10-15 per cent of the project cost as against 20-25 per cent in case of BOT (annuity) projects.

The equity portion might further come down as HAM concession agreement has a provision for the NHAI to grant 10 per cent of the total project cost as mobilisation advance to the concessionaire (the advance is set off proportionately against the construction period annuities).

To get this facility, the concessionaire has to provide a bank guarantee for a value of 110 per cent of the mobilisation advance.

Risks mitigated

According to Vijay Kumar, Associate Director, Ind-Ra, while earlier it seemed that such equity-lite HAM projects were unlikely to bring banks onboard, over one-and-a-half years (HAM projects began being awarded in 2016) some of the projects have achieved financial closure and many applications are pending with banks.

In a HAM project, the developer gets 80 per cent land upfront while the concession period is linked to the commercial operations date (COD) and not to an appointed date, which means excluding the construction time from the annuity. Hence, the construction overrun and time overrun risks as well as land acquisition are mitigated, Kumar explained.

At the same time, as net equity injection by the developer is minimised, the non-availability of funds — the issue most of the industry players are facing currently — is unlikely to hinder the construction progress.

“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,” Kumar said.

Ind-Ra data show that 60 per cent of the 27 projects awarded on the HAM model up to December 2016 have achieved financial closure. As for another 16 projects awarded by NHAI later (in 2017), the developers are yet to tie up financing.

Government focus

The HAM model has been introduced by the NHAI for awarding road projects as many private-public partnership (PPP) projects turned out to be less exciting for the industry than was expected.

Since then, around 50 per cent of the projects awarded by the NHAI last fiscal were HAM projects. Jayant Mhaiskar, Vice-Chairman and Managing Director, MEP Infrastructure Developers, told BusinessLine that NHAI had already announced 12-15 projects that are up for bidding in the next one-two months with total size of ₹10,000-plus crore. “Hybrid annuity is the main focus of the government other than the EPC model,” he said.

According to Mhaiskar, when HAM was introduced, lenders lacked clarity on certain aspects. “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,” Mhaiskar said.

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