HAM highway projects soar up costs upto 44 % There are...

HAM highway projects soar up costs upto 44 %

There are 9 projects where the variation between NHAI’s projected cost and the bid by the developer was in a range between 10% and 44%
212
0
HAM highway projects

HAM highway projects soar up costs upto 44 %.  Expectations of higher returns have driven up the bid prices in the hybrid annuity model (HAM)

43 projects were awarded by NHAI till end-March 2017.

There are 9 projects where the variation between NHAI’s projected cost and the bid by the developer was in a range between 10% and 44%

This is according to data sourced from research and ratings agency ICRA. There were three projects which were awarded in a range from 10%-20% while the remaining were over 30% higher.

Shubham Jain, vice president, ICRA, said, “Although this is a project-specific issue, usually, a variance of 10-15% is to be expected, depending on the project.”

“For bids that are over 15-20% than the estimated cost, may be NHAI could establish a more robust mechanism.

Such as setting a ceiling beyond which they do some due diligence before awarding the project”.

Industry players say the lag between the first draft project report made by NHAI and the actual bid taking place, can lead to a variance between the cost estimated by the NHAI and the lowest bid.

However, a variance higher than 30%, as seen in the projects that were awarded in March, suggests that developers are unwilling to work on thin margins.

Difficulty in achieving financial closures for these projects, too, has remained a concern for projects under the hybrid model.

“Most of the companies are building in their margins during the construction phase into the project cost itself, resulting in high internal rate of return on equity,” an analyst explained.

However, developers and industry experts justify their expectations, citing execution risk and the finance risk involved.

Jayant Mhaiskar, vice chairman and managing director, MEP Infrastructure Developers, said, “The bank finance is being raised on the company’s balance sheet and repayment of debt is company’s responsibility.

This involves a fair bit of risk which needs to be factored in the returns”.

A report by  Jefferies, earlier pointed out that early bidders are making a killing with a return on equity of more than 20%.

This is extremely high compared to even build, operate, transfer (BOT) projects that have margins ranging between 14% and 16%.

The road sector had borne the brunt of aggressive bidding in the past. Bidders quoted huge premium amounts to bag BOT road projects back in 2011-2012 based on highly optimistic road traffic estimates.

This backfired when the projections were not met, leaving a lot of these projects unviable.

The expectations of higher returns mean that there are more funds outgoing from NHAI towards the annuities that need to be paid to the developer. Thus, NHAI’s fund raising plans will be critical.

A move towards EPC projects in FY18 (given mixed response of lenders to hybrid annuity projects) would further test such ability of NHAI, it noted.

However, to NHAI’s credit, it recently mopped Rs 3,000 crore through its first overseas masala bond.

Funds with patient capital are understood to have shown keen interest in NHAI’s plans of monetising operational roads through the Toll-Operate-Transfer (TOT) model.

News link : www.financialexpress.com

Image link: www.google.co.in

LEAVE A REPLY