Fund crunch stalls road projects as new model faces old problems
According to data reviewed by Hindustan Times, 64 projects out of total 115 projects awarded under the hybrid annuity model (HAM) have failed to take off because they have not received financial closure.Updated: Oct 22, 2018 07:16 IST
More than half of the highway projects awarded under the National Democratic Alliance (NDA) government’s new model have been stuck for lack of funding, according to data reviewed by Hindustan Times, partly because the developers overextended themselves by bidding for too many projects and partly because banks are reluctant to loan them money.
The projects are based on the so-called Hybrid Annuity Model (HAM) that was introduced by the Centre in January 2016 with the objective of reviving projects that had been stuck during the previous United Progressive Alliance (UPA) regime for reasons ranging from lack of finances and statutory government approvals to their inability to complete land acquisition. Many developers then were forced to abandon projects.
Under HAM, the government offered to provide 40% of the cost to a developer to begin work on a project. The developer was to contribute the rest over the project’s execution period, and recover the money from the National Highways Authority of India (NHAI) as annuity.
HAM reduced the financial risks for developers, and was thought to be a better alternative to the build-operate-transfer (BOT) model. Under the BOT model, the contractor had to bear the entire cost and recover the investment by operating a project for a certain number of years.
HAM hasn’t quite worked the way it was meant to. According to the data reviewed by HT, 64 projects out of total 115 projects awarded under the hybrid annuity model have failed to take off because they have not received financial closure.
The stalled projects account for Rs 82,889.81 crore of the Rs 1,37,309.88 crore combined cost of HAM projects.
“We are having trouble getting financial closures for HAM projects. Since it’s the election season, the government has begun clearing certain projects in the engineering, procurement and construction (EPC) mode,” an official at the ministry of road transport and highways said, requesting anonymity.
Under the EPC model,the entire project is funded by the government, and the contractor is required to design and construct it after procuring land and labour.
The Cabinet Committee on Economic Affairs, at a meeting chaired by Prime Minister Narendra Modi in January 2016, approved the hybrid annuity model for infrastructure building.
“When the hybrid model was introduced, the thought was that by giving a 40% grant upfront and by covering the rest of the payments later, the equity that would be required will be significantly reduced. The issue is that people have gone and taken 10-15 projects under HAM and the amount of equity they have is unevenly spread in these projects. It is not something that was envisaged. There was never a limit put on the number of projects that anybody can bid,” said Kushal Singh, a partner at consulting firm Deloitte India.
Maharashtra and Gujarat are among the worst performing states when it comes to executing highway projects under the hybrid model, with 50% of projects stuck in both the states worth Rs 13,559.77 crore and Rs 14,537.56 crore, respectively. The two states also account for the highest number of HAM projects.
Maharashtra is the home state of Union minister of road transport and highways Nitin Gadkari and Gujarat is the Prime Minister’s home state.
Andhra Pradesh also has a dismal record — 88% of highway projects under HAM worth Rs 8,991.47 crore are stuck. Out of seven projects awarded in the state, only one has received financial closure. Among states where elections are due this year-end, both Chhattisgarh and Telangana have not received financial closures for any projects awarded under the model. Chhattisgarh has one project under HAM worth Rs 1, 140.80 crore stuck, while Telangana has two stalled projects worth Rs 1,886.63 crore.
In Rajasthan, 49.70% projects worth Rs 3,305.13 crore are stuck in the pipeline. Madhya Pradesh is the only poll-bound state performing better than others with 66.67% projects worth Rs 2,720 crore under construction.
Delhi is also one of the better performing states with only 23.79% of projects worth Rs 1,213.41 crore stuck under the hybrid model. One of they key reasons for developers failing to secure finances is the reluctance of banks in funding HAM projects.
“The apprehensions of banks is another major reason. Banks have been trying to reduce their exposure in the highways sector. They had many stuck BOT projects due to which they have termed roads as a risky sector which is not the case. If you look at it otherwise, HAM is a very clean model where the payment guarantee is given by the government. Hence the banks should not be apprehensive,” Singh added.