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HAM road projects hit fin closure hurdle

Only 13 of the 36 projects awarded so far have got financial closure as lenders are wary of fineprint; big players skewed towards EPC projects

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Union road transport & highways minister Nitin Gadkari had announced awarding of 15,000 km of highways this fiscal with much fanfare, but achieving financial closure for the newly introduced hybrid annuity model (HAM) is turning out to be a nightmare for developers.

While lenders are cautious in funding national highway projects being implemented through HAM, big players too are apathetic towards the model.

HAM is a combination of EPC and build-operate-transfer (BOT) models. Under it, the government will pay 40% of the project cost during initial five years through annual payments and the balance 60% is to be invested by the private player. This reduces risks and lessens funding needs.

During this fiscal’s initial 11 months, 36 HAM projects were awarded of which only 13 got financial closure, while three were terminated.

Vikash Sharda, director, capital projects & infrastructure at PwC, told DNA Money, “Up to January, 27 projects covering 1,522 km were awarded, with the combined project cost being Rs 24,345 crore. These projects were bagged by 15 companies. A couple of more will be awarded later this month.”

According to analysts, lenders aren’t upbeat on HAM projects due to certain risks with such projects.The concerns relate to termination clause, a cap on payment on termination, aggressive bidding by companies, non-availability of 80% of Right of Way to commence the project among others. Industry insiders said there is a need for a softer approach by the government and certain modifications in the HAM clauses.

“Lenders willing to fund such projects are ready to finance up to 40% of the total project cost. Whereas the developers are expecting lenders to finance 50% of the total cost,” said an industry insider.

Due to the ongoing financial crunch in the infrastructure sector, bigger players such as Reliance Infrastructure and Larsen & Toubro are opting for engineering, procurement & construction (EPC) contracts over HAM.

EPC model of contracts will continue to thrive and dominate if highways are to be developed and improved, but interest from the developers in such construction projects isn’t encouraging as most companies are of the opinion that National Highways Authority of India (NHAI) has limited financial resources, an analyst told DNA Money.

Officials from the Ministry of Road Transport & Highways said in the coming fiscal, focus would be to award major chunk of the total projects under EPC.

Sandeep Upadhyay, managing director and chief executive officer, Centrum Infrastructure Advisory Ltd, said, “HAM has met with limited success, primarily due to resistance from the lending community. The sentiment may be even more negatively skewed against the greenfield infrastructure projects which form a significant part of the stressed assets portfolio of lenders.”

It is crucial NHAI proactively addresses the perceived risks and reassures the potential stakeholders about the de-risked roll-out (Hybrid) model.

“Sharing comprehensive details about means of financing for mega development plan may also go a long way to instill confidence amongst potential stakeholders including the fact that once commissioned the operational HAM projects could be monetized on Toll Operate Transfer (TOT) scheme primarily accounting for a significant source of Annuity payouts on behalf of NHAI.”

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