The Centre employs several formats, like annuity, cash contracts, toll and hybrid annuity to award projects, in the road construction segment. Of late, the government’s focus has primarily shifted to the hybrid annuity model (HAM). This model is gaining traction for infrastructure projects but could result in unsustainable liabilities for the government, Business Standard reported.
What is HAM?
HAM is a mix of the EPC (engineering, procurement, and construction) and BOT (build, operate, transfer) models. In this model, the project concessionaire is selected through open and transparent bidding.
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The concessionaire receives a 40 percent cash construction support and must bear the 60 percent balance initially, which is then adjusted with semi-annual BOT annuity payments. The concessionaire has the responsibility of maintaining the road quality. The BOT model (toll) remains the default mode of delivery for national highway projects.
What are the challenges?
The cost of these annuity projects stood at Rs 38,775 crore as of March 2021. This comes as an addition to the Rs 3,46,343.8 crore of total outstanding guarantees as of March 2021. In just one year, Finance Minister Nirmala Sitharaman has added 11 percent to total liabilities from these annuity projects, reported Business Standard.
The reason behind the jump can be attributed to the reluctance of contractors to bid for the government’s projects, primarily because the payment flow is often uncertain. For example: In road construction, the National Highways Authority of India (NHAI) sometimes offers bids on exaggerated traffic projections, or the hassles of acquiring land pushed the project deadline.
Another reason could be the recent trend of participation from small developers in the bidding process because of the incentives. The smaller developers who changed lanes from engineering, procurement, and execution (EPC) projects to HAM for the first time, are struggling to secure funding after bidding aggressively.
Based on the committed 40 percent pay out by the government, the developer can raise the remaining 60 percent as equity or loans. In this case, banks are often reluctant to finance long-term infrastructure projects. This has decelerated the pace of financial closures, reported BS.
Also, delays in providing the appointed date or the effective starting date of a project by the NHAI to the developer or concessionaire have worsened, the report said.
The average delay is about 5-6 months. Around 2,540 km of the 6,670 km of the awarded HAM projects are awaiting the appointed date. And over 60-65 percent of the 2,540 km runs the risk of termination since the wait has exceeded 18 months, according to a CRISIL report.
The risks remain under control as long as the bidding-out agencies such as the NHAI can finance the new road projects from collections from those already built and in operation. In other words, they must keep monetising the older stretches to finance the new ones. The operational or soon-to-become operational projects could see a sharp improvement in credit quality, according to the CRISIL report. But this is not happening, as of now as half of them are less than five years old.
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Higher budgetary support
As a result, the Centre has decided not to burden the National Highways Authority India (NHAI) with additional borrowings in FY23, by providing much higher budget support of Rs 1.34 lakh crore aimed at controlling the entity’s increasing debt, reported Financial Express.
The liability of Rs 38,775 crore from 40 such annuity projects has been placed as direct government liability. The large numbers show that it is proving to be impossible for the NHAI to finance construction as annuity projects. In the future, the NHAI is expected to be more careful in signing on to fresh annuity projects.
