The construction cost for developers has gone down with projects being completed within the timeframe, a source said
Achanged financing framework for hybrid-annuity model (HAM) projects in the highways sector is creating better margins for construction companies and resulting in improved execution of projects.
The Union government pumps in 40 per cent of the equity portion in HAM contracts. “Since fund disbursement from the government is on time and happens during the construction phase itself, projects do not get stuck because of financing reasons,” said an official.
The government portion is usually released in five tranches. Officials in the ministry of road transport said the project execution had been fast-tracked due to the financing framework.
Once loans are secured and project execution begins, companies deploy more labourers and machinery for construction, helping faster completion, said an official. The construction cost for developers has gone down with projects being completed within the timeframe, the official said.
For instance, a highway contract that earlier took 24 months for completion is being completed in about 14 months, said the official.
Some ongoing highway projects — Delhi-Meerut Expressway, Saharanpur-Yamunanagar, and Somnath-Jetpur — are expected to be finished before their contracted timelines. “Companies also save on IDC or interest during construction paid by them to lenders,” the official added.
Experts say faster completion of projects is not always possible. According to Abhaya Agarwal, partner and PPP leader, EY India, the construction period has gone down by 25-30 per cent in some cases but not in all highway projects. This means a 24-month highway project is getting completed in 21-22 months as opposed to the central government’s claim of about 14 months.
So far, the government has awarded 14 HAM contracts total of 754 km at a cost of Rs 169 billion.
Land acquisition and other issues like clearances have been addressed to a large extent through changes in pre-project systems. Financing risks have also come down substantially.
Essentially, disbursement of funds from the government is done within a stipulated timeframe. Issues with banks on debt disbursement have also been mostly resolved.
Earlier, project developers were not putting in their portion of equity and leveraging the government equity grant to seek release of the loan money. This led to lenders withholding funds.
According to the ministry, a total of 50 projects of 2,697 km, at an estimated Rs 422 billion, have been awarded, so far. These projects include both HAM and EPC (engineering-procurement-construction) contracts.
Besides award of contracts, National Highways Authority of India (NHAI) invited bids for 10,460 km, costing Rs 1,750 billion, till January 2018.
The average length of road projects awarded by NHAI every year in the last five years was 2,860 km, while 4,335 km was awarded in 2016-17. The award target for the current financial year (2017-18) is 10,000 km. Projects of nearly 2,700 km, costing Rs 4,300 billion, have already been awarded by NHAI in 2017-18.
NHAI is set to complete construction of 3,500 km, as against the last five-years average of 2,170 km.
It has commenced work on 27 projects covering 1,330 km and will commence work soon on another 50 projects covering 3,000 km.
Both the ministry and NHAI plan to increase the portion of HAM projects in the award list for 2018-19. The government is of the view HAM would bring back private players in the sector, especially after banks have regained interest in financing such contracts.