Revival of PPPs in highways sparks fresh private infra investments: Moody's

Introduction of hybrid annuity model in 2016, as a variation of PPPs, does the trick, rebalancing certain project risks between public and private sectors

The Union government’s thrust on awarding highway projects based on the hybrid-annuity model (HAM) has rekindled private developers' interest in the sector. According to a report by rating agency Moody’s, the introduction of HAM has led to the new investments in roads and highways.

Moody's defines a PPP as a long-term contractual agreement between a public sector entity and a private developer to design, build, finance, operate and/or maintain an infrastructure asset for a specific period.

"Private investment in highway projects had been declining in recent years, amid issues such as slow project approvals and cost overruns, but the Indian government's introduction of the hybrid annuity model (HAM) in 2016 -- as a variation of PPPs -- has triggered new investment inflows," said Abhishek Tyagi, a Moody's Vice President and Senior Analyst.

Other sectors, such as ports, shipping and railways, are also looking at adopting the PPP framework in order to attract private investment.

The PPP model was adapted to India's highways sector in a way which, relative to more traditional PPPs, rebalances certain project risks between the public and private sectors. In addition, the government provides funding during the construction phase, thus addressing some of the key concerns of the earlier model, the report observed.

Typically, the government pumps in 40 per cent of the equity in the project and the remaining funds are arranged by the concessionaire.

The report also observed that private-sector participation in the traditional Indian PPP models such as build-operate-transfer (BOT)-toll and BOT-annuity was muted.

The rating agency said that the new model triggered a significant increase in projects awarded, with HAM projects accounting for around 46 per cent of total awards in terms of highway length and 63 per cent in terms of total value (Rs 765 billion) during the period March 2017 to March 2018.

Private investment in PPP highway projects had declined in recent years due to a number of reasons, including delays to project approvals and land purchases by the government, complicated dispute resolution mechanisms in the concession agreement, and lower-than-expected revenue because of aggressive assumptions.

Delays in project completion resulted in cost overruns and revenue losses for private concession owners, affecting the financial viability of some projects and their ability to service debt.

The first project under the hybrid-annuity model was awarded by the National Highways Authority of India (NHAI) in FY16. Private-sector participation in HAM projects has generally been healthy, though PPP projects that used the model initially faced challenges in achieving financial closure. Banks were also initially reluctant to provide financing, especially when the winning bidder was a new developer with either a weak balance sheet or a lack of construction experience in the region.

On the road again

• A PPP project is undertaken by a special purpose entity (SPE) that can only engage in the business of the project with project scope defined in the project agreement
• The SPE often raises project finance debt to finance upfront construction work, which is then repaid either solely or primarily from the project’s cash flow
• During the design and construction phases, the public entity might make certain milestone payments contingent on the private entity’s progress towards the completion of construction work