Balanced risk-sharing, lower permitting risks make HAM an attractive option to both developers and lenders. Here?s why!

Financial closure challenges however have resurfaced in the recent past
The hybrid annuity model (HAM), route in the road sector has garnered a favourable response, as reflected in the increase in the mix of HAM projects to overall awards from 8 per cent in FY2016 to 46 per cent in FY2018. According to an ICRA note, lower equity requirements, provision for mobilisation advances, better right of way availability, inflation linked adjustments for bid project cost, termination payments during construction period and de-linking of construction and operations period are the major positives of the hybrid annuity model (HAM). Further, around 92 per cent of the projects awarded through the HAM route till date, were quoted at a premium to the authority?s base price, with some HAM projects being awarded for as high as 47-51 per cent more than the authority base price. The number of bidders for these projects ranged between 3 to 10. Out of 95 total projects awarded during January 2016 to June 2018, 87 (almost 92 per cent of total projects) have been bid at a premium-to-base price of the authority whereas eight (8 per cent) have been bid at a discount-to-the-base price. The median premium stood at ~16.9 per cent and the discount at 7.5 per cent.

Giving more insights on the financial closure, Shubham Jain, Vice-President & Group Head, Corporate Ratings, ICRA, says: ?The time taken to achieve financial closure (FC) has reduced considerably by more than 50 per cent from 430 days in FY2016 to 194 days in FY2018. Although the private sector banks have taken the lead in funding HAM projects, the FC-related challenges resurfaced in the recent past given the stress in banking system and with many PSU banks being under prompt corrective action. Increasingly new developers are taking high exposure to HAM projects for whom achieving FC could be even more challenging in the current situation.?

The median debt-to-equity ratio for the projects, which achieved FC, is 3.9:1 (excluding 40 per cent grant from NHAI) with a tail period is one and a half years. As on date, ~70 per cent of the projects awarded till June 2018 have achieved financial closure.

Handing over 80 per cent of right of way (RoW) on appointed date is the obligation of the authority which is a condition precedent for HAM projects, failing which an appointed date cannot be announced. Therefore, for all HAM projects, 80 per cent RoW is made available before the appointed date. In the event, the authority is unable to provide the remaining site within 180 days from the appointed date, the same is removed from the scope of the work under the provision of the change of scope. If the appointed date is not announced before the first anniversary of the concession agreement date, the HAM awards are deemed to be terminated. Further, the construction and operations period are de-linked. Thereby, the number of semi-annuities remains fixed at 30 (15 years of operational period) unlike earlier BOT (Annuity) projects where any increase in construction period would lessen the operations period since the concession period is fixed.

Speaking on HAM projects being rated at a higher level even during construction, Jain added: ?The compliance from the authority on right of way and other prerequisite approvals has improved for HAM projects, resulting in lower execution risks. Around three-fourth of the HAM developers are rated in category A and above with relatively strong execution track record and financial capabilities. The features of HAM like automatic-descoping, upfront 80 per cent RoW availability, deemed termination clauses and low equity mobilisation risk is resulting in lower execution risks. Given the lower execution risks, HAM SPVs are able to get better ratings even during the construction phase.?