Innovative risk sharing model to catalyze toll road investments

Bhadrak Section of NH-5

The Indian government sought to construct a total of 200,000km of national highways by 2022, which required significant private investment
Toll road public private partnerships (PPPs) were on the decline with investors gradually losing interest despite success in the Build-Operate- Transfer (BOT) model between 2009 and 2013

Investors were increasingly hesitant to take on financing risk under conventional BOT/Engineering Procurement Construction (EPC) procurement models1 as a result of several issues, including slow project approvals and the frequency of cost overruns
Additionally, traffic volatility heightened the commercial risks for investors

Hybrid Annuity Model (HAM) combines EPC and BOT models, providing a unique risk sharing model
The government participates in financing risk by covering 40% of project construction cost2, while the private player take on the remaining 60% through debt and equity
Commercial risk is borne by the government, while the concessionaire receives semi-annual annuity payments3 for maintenance of the road

National Highways Authority of India (NHAI) — Responsible for partially financing the project and collection of tolls
Private player — Responsible for financing and maintaining the toll road
Banks — Provision of loans

Between 2017-2018, HAM projects accounted for 46% (3,396km) of total awards in highway length and 63% (USD 10.6B) in terms of total value
National highway projects worth approximately USD 1.4M have been approved under the Hybrid Annuity Model in financial year 2018/19; HAM projects are targeted to constitute 60% of the projects awarded by the NHAI
As of May 2019, 90% of all awarded HAM projects worth over USD 14B have achieved debt funding
In FY2019, projects awarded through HAM slowed down to around 834km of the overall 2,222km of projects awarded by NHAI

Structuring of partnership model and risk allocation needs to take into consideration the overall business and funding environment in order to attract private investment
Easing the burden of financing through innovative partnership models such as HAM is no panacea; project fundamentals are still critical to ensure success of project financing and delivery
Governments can play a key role in bridging lenders with projects by actively engaging lenders and addressing concerns (e.g., NHAI notifies the Appointed Date1 only when 80% of land is procured, which mitigates land acquisition risk)