Against the backdrop of the announcement made by the Finance Minister during his Budget speech about revisiting the existing PPP models and the need to rebalance the risks in PPP model with the government bearing a larger part of the risks, broad guidelines for ‘Hybrid Annuity’ model were announced by NHAI. Hybrid Annuity Model (HAM) is a mix of EPC and BOT (Annuity) models, with government and private enterprise sharing the total project cost in the ratio of 40:60. With the Government funding 40% of the project cost as determined by NHAI in five equal installments during the construction period, the financial burden on concessionaire will reduce during the project implementation phase. The Government will also retain the revenue risk as it would collect toll. On the other hand the private player will bear construction, operations and maintenance risks. Since the Government will bear 40% of the project cost during the implementation phase, the returns to the private developer in the form of annuities during the operating phase will be proportionately lower when compared with normal annuity project fully funded by private developer. As per ICRA’s study of Build Operate Transfer (BOT) projects, the developer’s cost estimates have been higher than NHAI’s cost estimates by 35% on average; in such cases, the equity contribution in Hybrid annuity model is around 30% lower on gross basis when compared to normal Build Operate Transfer (BOT) (Annuity) model.
According to Mr. Rohit Inamdar, Senior Vice-President, ICRA, “When compared with Engineering, Procurement and Construction (EPC) projects, shift to Hybrid Annuity model would ease the cash flow pressure on NHAI as it would have to provide only 40% upfront funding spread over the 30-36 months of construction period, and remaining 60% over 15-20 years of the concession period, in the form of semiannual payments which can be recovered to an extent through tolling of these stretches by NHAI itself. Therefore, NHAI’s own upfront funding requirement will be lower in case of hybrid annuity compared with EPC mode. The hybrid annuity model will also benefit the developers as they will be required to achieve financial closure only for 60% of the total project cost. Moreover, if the EPC work is taken up in-house the developers’ net equity contribution could be lowered further by way of potential profits that would be earned in EPC business. Further, annuity nature of the projects would eliminate traffic related risks thereby improving ease of financial closure and refinancing ability post project completion. Therefore, when compared to normal BOT (Toll/Annuity) projects, we believe that this model could attract more private sector participation. However, a lot would depend on NHAI’s ability to ensure 100% right of way and approvals before awarding these projects and the variation between NHAI and developers’ cost estimates.”
The FY16 Budget proposes to introduce Public Contracts (Resolution of Disputes) Bill for speedy dispute resolution, a positive development given that around Rs. 200 billion worth claims are pending with NHAI. If the dispute resolution process is expedited and frees-up the stuck capital under arbitration claims, the liquidity position of some developers could improve significantly. There has been demand from the private developers for setting up a regulator for the sector for resolution of disputes between contractor/developer and NHAI, as they feel that the present dispute redressal method is time consuming and costly thus inefficient, the introduction of this Bill could address their concern.
Several other initiatives like revamping of NHAI in order to speed up the decision making process and bring in greater transparency, foreclosure of stalled projects, fund infusion by government to revive languishing projects and introduction of build and auction model are currently under various stages of discussion; these initiatives if implemented would have a positive impact on the sector.
Mr. Inamdar added, “The Road Ministry has announced an ambitious target to build 30 km of road length per day during FY16. Not only is the target steep in relation to the peak national highway construction of 7.41 km/day achieved in FY13 and 3.61 km/day achieved in 10MFY15, it will also need funds in excess of Rs. 1610 billion over the next three years – FY16 to FY18 – to fund national highways alone. To meet the growing funding requirement in this sector, the total budgetary allocation for FY16 has been increased by Rs. 140.31 billion (27%) to Rs. 662.7 billion from Rs. 522.39 billion in FY 15. In addition, conversion of existing excise duty on petrol and diesel to the extent of Rs. 4 per litre into Road Cess will bring additional Rs. 400 billion part of which is expected to fund investments in roads along with infrastructure bonds. Moreover, the government’s intention of setting up of National Investment and Infrastructure Fund (NIIF) with initial fund infusion of Rs. 200 billion and its further leveraging would provide additional funds.”
During current financial year, the traffic volumes have picked up; in H1 FY 15, the traffic growth has been 4.1% in PCU terms which further improved to 6.8% during 9M FY 15 when compared to a de-growth of 1.1% during 9M FY 14. MAV sales which is a lead indicator for traffic growth increased by 38.9% during 9M FY 15. In addition to replacement led demand in MAV segment, the growth was supported by improved fleet utilization and addition by cement and automobile sectors.
Mr. Inamdar added, “Anticipated growth of 12-14% in MAV segment during FY16 augurs well for future traffic volumes. These growth expectations are based on the gradual recovery in the economy and also possible resolution of mining related issues in the states of Goa, Karnataka and Orissa. Coal transportation is also expected to show an uptick with the conclusion of recent coal block auctions.
However, the declining trend in WPI is a cause for concern for operational roads. For FY 16, the rate hike for projects which were bid post 2008 (3% p.a. increase over 2008 rates + 40% of WPI) is expected to be in the range of 2%-2.65% and for projects which were bid prior to 2008 (fully linked to WPI); revision would be based on WPI for March 2015. Going by the formula, rate revision could even be downwards, even though clarity is awaited on whether toll rates can actually be revised downwards.”
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