Mumbai: Infrastructure major Larsen and Toubro Ltd (L&T) believes that the hybrid annuity model (HAM) for highway construction is not sustainable, particularly given the already existing stress in the sector.
Under the HAM, the government commits up to 40% of a project cost and hands it over to the developer, who has to fund the balance 60% with debt and equity. Under it, toll collection is the responsibility of the National Highway Authority of India (NHAI), with the developer receiving an annuity in instalments.
R. Shankar Raman, L&T’s whole time director and chief financial officer, said while the HAM is a function of the government’s acknowledgment that the build, operate, transfer (BOT) model wasn’t the key to the country’s ambitious highway construction targets, it isn’t a sustainable one.
“I think the minister (Nitin Gadkari), when he took over, and wanted to re-energize the sector, came quickly to the conclusion that the traffic risk that was pushed on to the developers was too intense for them to sustain.
“So, he wanted to take away a portion of that traffic risk and hence introduced the hybrid annuity model (HAM), which is half way between an annuity and a full-blown build, operate and transfer (BOT). But we must realize that this was done with the intention of, sort of, fixing some potholes, rather than finding a sustainable solution," Raman said on Saturday at a press conference, post the company announcing its September quarter earnings.
He added that the reason behind the HAM being not sustainable was that developers today didn’t have the deep pockets they had 10 years back.
Earnings reported by L&T on Saturday said that the company’s net revenue from the developmental projects segment, which includes roads, jumped 27% year-on-year during the September quarter to Rs1,220 crore. Despite this, the company said it won’t be able to meet its order inflow guidance of a growth of 12-14% in the financial year 2017-18.
“In so far as orders are concerned, we have looked at the pipeline once again as we regularly do. And we have also factored in that we are delayed by close to three months in terms of orders that we were expected to win. Considering that at the half year are at about -9%, our assessment is that we might pretty much land similar to the orders we reported in the previous year with the possibility of a marginal improvement," Raman said.