The hybrid annuity model will be the fourth model introduced in India for highway projects. It is a mix of BOT toll and EPC models, with the government providing 40% of project costs during construction. This is expected to bring back old contractors by reducing equity requirements, attract international contractors through lower risk, ease lending by removing traffic risk, and speed up project completions through inflation protection.

1. Five ways in which the new
hybrid annuity model will impact
highway projects
The hybrid model will be the fourth to be introduced in India for
execution of road projects
P.R. Sanjai
The hybrid annuity model is intended to kickstart stalled projects and
accelerate highway construction. Photo: Mint
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Mumbai: The cabinet committee on economic affairs (CCEA) on Wednesday
approved a hybrid annuity model for national highways, clearing the way for
stranded road projects worth Rs.25,000 crore.
While engineering, procurement and construction, or EPC, was the preferred
mode for highway project development in 2013-14 and 2014-15, it suffered
from an inherent limitation—the financial resources available with the
government.
This is what led the ministry of road transport and highways to introduce an
alternative mode of project delivery to sustain the pace of implementation of
highway projects through optimum utilization of available financial resources.
The hybrid model will be the fourth to be introduced in India for the execution
of road projects and is intended to kickstart stalled projects and accelerate
highway construction.
The three formats for road projects in India followed so far are:
One, build-operate-transfer (BOT) annuity, in which a developer builds a
highway, operates it for a specified duration and transfers it back to the
government, which then pays the developer annuity over the period of
concession.
Two, BOT toll, under which a concessionaire generates revenue from the toll
levied on vehicles using a road.
Three, EPC, wherein the developer executes the project on behalf of the
government.

3. The hybrid annuity model is a mix of BOT toll and EPC models.
So how will the new hybrid annuity model impact highway projects?
Return of old contractors
“The hybrid annuity model probably has some hope of bringing a few select
Indian contractors back into the highway concession business, where they may
have struggled to deploy capital into toll roads. This model involves lower
equity outlay upfront and substantially higher revenue certainty,” said Rajesh
Samson, partner, mergers and acquisition, EY LLP.
India has the second-largest road network in the world, spanning around 50
lakh kilometres, consisting of national highways, state highways, rural, urban
and district roads.
Leading developers, including Larsen and Toubro Ltd, IL&FS Transportation
Networks Ltd (ITNL), GVK Power and Infrastructure Ltd, GMR Infrastructure
Ltd, IVRCL Ltd, Gammon Infrastructure Projects Ltd and Hindustan
Construction Co. (HCC) Ltd, are no longer actively participating in road
construction bids as their balance sheets are stressed.
These companies have all faced several issues in highway development,
including delay in environment clearances, lower traffic against estimates,
high interest rates and ballooning debt.
The government aims to complete construction of 6,325 km of highways in
FY16, as against 4,410 km in FY15. The National Highways Authority of India
(NHAI) and the ministry together completed 3,000 km of highways during
April-September 2015. The rate of completion improved to 16 km per day
from 12 km per day in FY15. The required rate is 17 km per day in FY16.
Enter international contractors
“I do hope international road contractors will view this as a low-to-moderate
risk deferred payment EPC contract and use the (hybrid) model as a
significant contracting opportunity,” Samson said.

4. “Because of the huge planned government outlay in the space and lower risk
participation models, we have been seeing more signs of interest from
international players in our domestic contracting market in recent times,”
Samson added.
Click here for enlarge
Companies such as Isolux Corsán of Spain and I Squared Capital New York are
scouting for road assets in India.
In addition, India’s transport minister Nitin Gadkari is seeking as much as a
record Rs.70,000 crore in government spending to boost road construction
and spur economic growth, Bloomberg reported on Thursday.
The overall target is Rs.5 trillion of road projects over the next three years, he
said.

5. India would need more private road contractors to meet this target.
No aggressive bidding
“Sure, the hybrid annuity model gives a lot of flexibility for a bidder. But that
does not mean that we will rush for bidding and resort to aggressive bidding,”
said a senior executive with a conglomerate that has huge exposure to roads.
“We don’t have sufficient financial muscle to opt for aggressive bidding. We
will evaluate the road projects cautiously,” he added.
Click here for enlarge
Samson of EY said that in spite of the lower equity investment requirement
and the minimal revenue risks in this model, many existing companies with
hugely stressed balance sheets may still struggle to participate in these bids

6. because any incremental equity outlay and project finance may be beyond
their present means.
It will also see new and small companies bidding for highway projects instead
of focusing on EPC opportunities.
Stress-free lending
“Lending for hybrid annuity-modelled projects would be comparatively easier
as there is no traffic risk associated. Lenders would be comfortable as the
execution risk is less for contractors as the bidding rolls out only after 90%
land is available,” Ashish Agarwal, director (infrastructure) at Equirus Capital
(P) Ltd, said.
According to a note by the State Bank of India (SBI) on 6 January, the
developer will receive 40% of project cost from NHAI during the construction
period as support. The selected developer is responsible for designing,
building, financing (60% of the project cost), operating and transferring the
project at the end of the operations period (15 years).

7. Click here for enlarge
The SBI note said the amount financed by the developer during the
construction period is to be recovered from NHAI through annuity payments
along with interest payments (at bank rate plus a prescribed percentage) on
reducing balance method.
SBI pointed out that it expects soft interest rates and sharing of the 40%
project cost under the hybrid annuity model to provide some comfort to
industry players operating with high levels of debt and interest expense ratios.
“Consequently, we expect margins of the industry to recover marginally in
FY16 backed by growth in revenue and reduction in financing expenses,” the
SBI note added.
Speedy completion of projects
Introduction of the hybrid annuity model is expected to result in speedy
completion of projects.

8. “For private participants, this allows them to focus on execution of the
projects wherein they will be hedged against inflation risk associated with
increasing cost of raw materials as project cost will be allowed to increase with
inflation,” Agarwal of Equirus said.
The hybrid annuity model has provisions for inflation-adjusted project cost
over time.
In addition, operation and maintenance (O&M) responsibilities are with the
concessionaire with separate provisions for O&M payments.
“While the private partner continues to bear the construction and
maintenance risks as in BOT toll projects, it is required only to partly bear
financing risk. Further, the developer is insulated from revenue or traffic risk
and the inflation risk, which are not within its control,” the ministry said.
Govt approves hybrid annuity model
for highway projects
PTI
NEW DELHI, JANUARY 27, 2016 13:42 IST
The government on Wednesday approved hybrid annuity model for building
roads to fast-track highway projects, revive the Public-Private-Partnership
(PPP) mode and attract more investments in the sector.
“The Cabinet Committee on Economic Affairs, chaired by the Prime Minister
Narendra Modi, has given its approval for the Hybrid Annuity Model as one
of the modes of delivery for implementing the Highway Projects,” said a
statement from the Ministry of Road Transport and Highways.

9. Under this model, the government will provide 40 per cent of the project cost
to the developer to start work while the remaining investment has to be made
by the developer.
“Adopting such a model for projects not found viable on BOT (Toll) mode,
shall be more effective in terms of maximising the quantum of kilometres
implemented within the available financial resources of the Government,” the
statement said.
The main objective of the approval is to revive highway projects in the
country by making one more mode of delivery of highway projects, it said.
It said by adopting the model, all major stakeholders in the PPP arrangement
— the Authority, lender and the developer, concessionaire would have an
increased comfort level resulting in revival of the sector through renewed
interest of private developers/investors in highway projects and this will bring
relief thereby to citizens/travelers in the area of a respective project,” the
government said.
It will facilitate uplifting the socio-economic condition of the entire nation
due to increased connectivity across the length and breadth of the country
leading to enhanced economic activity, it said.
Road Transport and Highways Minister Nitin Gadkari has recently said, “No
one (private players) was ready to participate in the PPP-based projects as
they had lost faith (in the previous government). However, to encourage
private participation, we have also introduced a hybrid model, where we will
share the risk with them.”
The decision taken on September 11 last year by the CCEA has delegated the
authority for deciding on the mode of delivery of highway projects to the
Ministry.
The erstwhile Planning Commission has developed the first version of the
Model Concession Agreement for roads in 2006.

10. This was done considering the need to standardise documents and processes
for the PPP framework in the country for ensuring uniformity, transparency
and quality in development of large—scale infrastructure projects.
Subsequently, the Planning Commission had developed various other
versions of the MCA for highways considering the different PPP modes like
BOT (Toll) and BOT (Annuity) addressing to a significant extent, the sector’s
changing needs of the sector.
“One of the documents developed by the Planning Commission for
infrastructure including highways is the MCA for Annuity Projects —version
April, 2014,” the statement said.
The statement said the latest MCA provides an alternative model in the form
of Design, Build, Operate and Transfer (DBOT) where the project is financed
only to the extent of a certain percentage of the cost by the private investor.
This investment is recovered through annuity payments to be made by the
government/Authority over a specified period commencing from the date of
commissioning of the project, it said, adding that the balance percentage of
the project cost is provided by the government during the construction period.
Since the need for improved road connectivity is a continuing imperative, the
MoRTH including its implementing agencies like the National Highways
Authority of India (NHAI) had to increasingly resort to the public funded
engineering, procurement and construction.
The government said there is an inherent limitation in implementing projects
on EPC mode as such implementation is restricted by the financial resources
available with the government.
“In that context, MoRTH intends to introduce an alternative mode of delivery
in order to sustain the pace of implementation of highway projects through
optimum utilisation of available financial resources. Accordingly, it was
decided to consider the Planning Commission MCA for Annuity Projects —
version April, 2014,” it said.

11. This model also provides an increased comfort level for the lenders and
concessionaires as traffic and inflation risks are taken by the Authority.
An important feature of the Hybrid Annuity Model for highways development
is the rational approach adopted for allocation of risks between the PPP
partners — the Government and the private partner i.e. the
developer/investor.
While the private partner continues to bear the construction and maintenance
risks as in BOT (Toll) projects, it is required only to partly bear financing
risk, it said.
“Further, the developer is insulated from revenue/traffic risk and the inflation
risk, which are not within its control,” the statement said.