Project awarding, execution under HAM to improve: CARE

The pace of awarding road projects and their execution under the new Hybrid Annuity Model (HAM) is expected to rise over the period with the increase in developers' participation, says CARE Ratings.

The agency expects increase in the pace of execution while protecting lender's interest due to stringent performance related clauses, emphasis on physical progress and permitted deemed termination as well as deemed completion.

"The execution pace is expected to improve due to stringent clauses for the damages and encashment of performance as well as additional performance security in the event of delay by concessionaire as compared with conventional design, build, finance, operate and transfer model," the agency added.

According to CARE, developers' participation has also increased to around 10 bidders in projects awarded in May 2016 as compared with two to four bidders in the first few projects awarded on this basis.

"The hybrid annuity model is expected to benefit the road sector with increase in pace of award of contract and addressing the bottleneck of earlier toll-based and annuity-based project. At the same time it also provides relief to the developers with reduced funding commitment while offering assured returns over project life cycle," the report said.

It further said developers with in-house EPC team, good financial flexibility and demonstrated execution track record are expected to benefit from the model.

As per CARE estimates, Project IRR before tax is expected to remain around 10-12.50 percent against low cost of capital of around 6.78-7.75 percent.

Equity IRR before tax is expected to remain around 15-20 percent, which is expected to incentivise the developers for the bidding.