Hybrid annuity model shifting gears but challenges like land acquisition remain: Ind-Ra

Land acquisition delays continue to hamper highway projects on hybrid annuity model (HAM) despite managing to achieve timely financial closure, India Ratings and Research (Ind-Ra) said on Tuesday.

While 50 per cent of these projects achieved timely financial closure, 30 per cent slipped beyond 90 days from the stipulated 150 days on account of issues like lack of appetite, lending freeze by banks and delays in land acquisition, Ind-Ra said in a report.

In order to fast-track highway projects, revive the public-private-partnership (PPP) mode and attract more investments, the government had approved HAM, under which it provides 40 per cent of the project cost to the developer to start work, while the remaining investment is made by the developer.

"Ind-Ra believes that most HAM-based road projects have managed to steer away from financial closure issues but land acquisition-related problems continue to hinder the commencement of project construction," it said in a statement.

Additionally, inability of banks to pass on the interest rate benefit could affect the investor returns by around 150 bps, it said, adding there is an emerging trend of acquisition of projects that are in the under-construction phase, which is likely to gain momentum in the second half of FY20.

The delays in timely financial closure stemmed from lack of appetite, lending freeze on many public sector lenders, and cherry-picking of projects by private banks, it said.

"Of the total projects studied by the agency, 15 per cent are yet to be awarded by the appointed date due to delays in land acquisition. Developers have already forfeited four projects citing similar issues. Although 80 per cent land availability offers an edge for swifter completion of project in HAM over earlier revenue models, the delay in providing encumbrance-free land continues to weigh on the road sector," the statement said.

Only 30 per cent of the projects have received appointed date on time, and more than 20 per cent of the projects have been delayed by more than six months, according to the rating agency.

In terms of construction progress, it said 75 per cent of the projects have progressed in line with the schedule. Ind-Ra's study showed that projects drifted from timelines due to either equity injection delays - stemming from weak sponsors - or land acquisition/ approval-related issues.