Hybrid annuity model to boost PPP projects: ICRA

MUMBAI: The hybrid annuity model announced by the government that proposes to reduce risks in public private partnership format is likely to provide impetus for the next wave of PPP road projects, said ICRA.

The model is a mix of EPC and BOT formats, with the government and the private enterprise sharing the total project cost in the ratio of 40:60, respectively.

National Highways Authority of India ( NHAI) had recently laid down the guidelines for the hybrid annuity model (HAM) in which the government funding to the extent of 40 per cent of the project cost will come in five equal instalments during the construction period, thus reducing the financial burden on concessionaire during the project implementation phase.

"When compared with EPC projects, shift to HAM would ease the cash flow pressure on NHAI. Moreover, the spends can be recovered to an extent through tolling of these stretches by NHAI itself. Therefore, NHAI's own upfront funding requirement will be lower in case of hybrid annuity compared with EPC mode," ICRA's senior vice-president Rohit Inamdar said.

He further said the hybrid annuity model will benefit the developers as they will be required to achieve financial closure only for 60 per cent of the total project cost.

"Moreover, if the EPC work is taken up in-house, the developer's net equity contribution could be lowered further by way of potential profits that would be earned in EPC business. Further, annuity nature of the projects would eliminate traffic related risks thereby improving ease of financial closure and refinancing ability post project completion. HAM would also attract more private sector participation," he said.

Inamdar, however, observed that a lot would depend on NHAI's ability to ensure 100 per cent right of way and approvals before awarding these projects and the variation between it and developers' cost estimates.

The FY16 Budget proposes to introduce Public Contracts (Resolution of Disputes) Bill for speedy dispute resolution, a positive development given that around Rs 20,000 crore worth claims are pending with NHAI.

"If the dispute resolution process is expedited and frees up the stuck capital under arbitration claims, the liquidity position of some developers could improve significantly.

"There has been demand for setting up a regulator for the sector for resolution of disputes between contractor or developer and NHAI, as they feel that the present dispute redressal method is time consuming and costly thus inefficient, the introduction of this Bill could address their concern," he said.