INDIAN ROAD SECTOR

Hybrid Annuity Model:

Against the backdrop of the announcement made by the Finance Minister
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 a study of BOT projects, the developers
cost estimates have been higher than NHAIs 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 BOT (Annuity)
model as depicted in the table below:
Table Equity contribution from developers
BOT
(Annuity)
Equity contribution (assuming 75:25 D/E 34%
and developer cost to be 35% higher
than NHAI
Net equity contribution adjusted for EPC 18%
profits (assuming EPC cost at 80% of
total project cost as per developers
estimates@ 15% margin)

BOT
annuity)
24%

(Hybrid

8%

When compared with 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, NHAIs own upfront funding requirement

will be lower in case of hybrid annuity compared with EPC mode. The hybrid
annuity model will 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, HAM model
could attract more private sector participation. However, a lot would depend
on NHAI's ability to ensure 100% RoW and approvals before awarding these
projects and the variation between NHAI and developers cost estimates.
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 FY15, 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
governments 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.
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.