Revival of PPPs in highways sparks fresh private infra investments: Moody's

New Delhi: Introduction of hybrid-annuity model has led to new investment in roads and highways, says Moody’s

The central government’s thrust on awarding highway projects based on the hybrid-annuity model (HAM) has rekindled private developers’ interest in the sector, according to rating agency Moody’s.

The agency in a report has said the introduction of the HAM has led to new investment in roads and highways.

Moody’s defines public-private partnership (PPP) as a long-term contractual agreement between a public sector entity and a private developer to design, build, finance, operate and/or maintain an infrastructure asset for a specific period.

“Private investment in highway projects had been declining in recent years amid issues such as slow project approvals and cost over-runs, but the Indian government’s introduction of the hybrid annuity model (HAM) in 2016 — as a variant of PPPs — has triggered investment inflows,” said Abhishek Tyagi, vice-president and senior analyst, Moody’s.

Other sectors such as ports, shipping, and railways are also looking at adopting the PPP framework.

Relative to traditional PPPs, the PPP model in the highways sector has been designed in a way so as to balance project risks between the public and private sectors.

In addition, the government provides funding during the construction phase, the report observed. Typically, the government pumps in 40 per cent of the equity in the project and the concessionaire arranges for the rest.

The report also observed that private-sector participation in the traditional Indian PPP models such as uild-operate-transfer (BOT)-toll and BOT-annuity was muted.

The rating agency said the new model triggered a significant increase in projects awarded, with HAM projects accounting for around 46 per cent of the total in terms of highway length and 63 per cent in terms of value (~765 billion) between March last year and March this year.

Private investment in PPP highway projects had declined in recent years owing to reasons such as delays in project approvals and land purchases by the government, complicated dispute resolution mechanisms in the concession agreement, and lower-than-expected revenue.

Delays in project completion resulted in cost over-run and revenue losses for private concessionaires, affecting their ability to service debt.

The first project under the HAM was awarded by the National Highways Authority of India in 2015-16.

Private-sector participation in HAM projects has been healthy, though PPP projects that used the model initially faced challenges in achieving financial closure.

Banks were initially reluctant to provide financing, especially when the winning bidder was a new developer with either a weak balance sheet or a lack of construction experience in the region.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.