The hybrid-annuity model (HAM) is anticipated to be the preferred mode in executing highway projects in 2018-19 because it is expected to bring back private players in the sector, according to the Centre and the National Highways Authority of India (NHAI).
Optimism has returned after banks have regained an interest in financing such contracts.
Officials of the Ministry of Road Transport are of the view that shifting the focus from EPC (engineering, procurement, and construction) contracts, which are fully funded by the government, will lead to savings.
“The hybrid-annuity component in the award of projects would see an increase in the next fiscal,” an official said. Typically, in a hybrid-annuity project, the central government pumps in 40 per cent equity while the remaining part is arranged by the concessionaire. Some experts say land acquisition, a crucial component of any infrastructure project, in hybrid-annuity is easier than for an EPC project. According to them, an EPC project is awarded to the concessionaire within a fortnight of inviting bids and 90 per cent of the land acquisition process has to be done before the award of the project. This leaves a very small window for completing the process.
There are multiple stages in land acquisition. While an EPC project can be awarded only after the 90 per cent norm has been adhered to, a hybrid-annuity contract can be awarded during the initial stages of land acquisition because the period between announcing the winning bid and completing financial closure is about four to five months.
However, former road secretary Vijay Chhibber said, “Land acquisition is independent of the mode of project execution.” At the same time, he agreed that the Union government’s thrust on awarding hybrid-annuity contracts in the next fiscal was a right step. “Lending is not a problem for the road sector.
Therefore, to bring back private investment in the sector, this is the right approach. The advantage in the case of a hybrid project is that the annuity is paid for the duration of the contract (usually 15 or 20 years), which takes care of the maintenance of the road,” Chhibber added.
The government not only saves money on constructing the project but also on the maintenance of the contract, according to him. Earlier, the award of hybrid projects slowed because banks were not willing to lend to private players.
In a hybrid project, companies, however, were using the government portion for raising money from banks instead of pumping in their own equity. This led to banks developing cold feet in funding such projects. Sources in the ministry and the NHAI, however, said the issue had been ironed out. According to the latest data (May 31, 2017) on the NHAI website, of the 31 completed projects 16 are in EPC mode. But the picture next year would be different, an NHAI official said.
The ministry is aiming to complete more than 9,000 km of road projects by March and this number is expected to go up in the next financial year.