Home >News >India >Investors wary of road assets under hybrid annuity model
Under HAM, the government commits up to 40% of the project cost over a period and hands over the project to the developer, who has to fund the balance with debt and equity, and is paid annuity income in instalments. (Photo: Aniruddha Chowdhury/Mint)
Under HAM, the government commits up to 40% of the project cost over a period and hands over the project to the developer, who has to fund the balance with debt and equity, and is paid annuity income in instalments. (Photo: Aniruddha Chowdhury/Mint)

Investors wary of road assets under hybrid annuity model

  • Aggressive bids, execution woes make assets unattractive, says Cube Highways executive
  • Cube has set up a thorough evaluation process for HAM projects, given the challenges

MUMBAI : Financial investors may be cautious about backing road assets bid out to private sector developers under the hybrid annuity model (HAM) due to the aggressive bidding amounts, execution challenges and weak financial health of the developers, said a senior executive of Cube Highways, the biggest buyer of road assets in India.

Cube Highways was set up by global infrastructure investor I Squared Global to acquire operating road assets and is backed by institutional investors such as International Finance Corp. and Abu Dhabi Investment Authority.

“We expect some of these projects to lose their inherent attractiveness because of aggressive bidding strategy of sponsors; construction challenges such as land availability, project scope and environmental issues leading to potential time and cost overruns; financial closure constraints; execution track record of sponsors; and financial health of sponsors," said Sandeep Lakhanpal, head, mergers and acquisitions and business development, Cube Highways and Transportation Assets Advisors Pvt. Ltd.

Under HAM, the government commits up to 40% of the project cost and hands over the project to the developer, who has to fund the balance with debt and equity, and is paid annuity income in instalments.

Lakhanpal said Cube has set up a thorough evaluation process for HAM road projects given the challenges and acceptance rate for the projects so far has been about 7%.

“We have developed a very detailed selection criteria of HAM projects, which do not fall in any of the above-mentioned cul-de-sacs. We conduct a very thorough due diligence on all of the above parameters and, once a project passes through all our selection filters, we commit capital to it, under an attractive risk-reward financial structure," said Lakhanpal.

Last September, Cube Highways had agreed to acquire five HAM road assets from Madhya Pradesh-based roads developer Dilip Buildcon Ltd.

In 2019, it had also placed 5,011-crore winning bid for road assets put up for sale by the National Highways Authority of India (NHAI) under the toll-operate-transfer model, and had backed Reliance Infrastructure Ltd’s DA Toll Road Pvt. with around 3,600 crore.

According to Lakhanpal, the Indian roads space had presented investors with several large-scale attractive opportunities in 2019 and large institutional players had channelled investments aggregating in excess of $2.5 billion. Cube Highways led the acquisitions, committing capital to 20 highway assets, he said.

Lakhanpal said the recent NHAI move to deploy mandatory FastTag for toll payments will further improve the attractiveness of the sector for investors.

“With NHAI as a strong counter-party, the road sector enjoys minimal counter-party risk, unlike other infrastructure sectors in India. Moreover, the mandatory roll-out of fast tag lanes by NHAI at all national highway toll plazas is expected to improve the efficiency of toll collections, reduce toll leakages and decongest toll plazas, in turn providing a fillip to toll revenue across projects and the attractiveness of the sector," said Lakhanpal.

While yield chasing foreign institutional investor interest in Indian roads sector is expected to increase going ahead, Lakhanpal believes that most of the new investors will tie up with existing established platforms, instead of going out on their own, given that most of the less risky assets have already been picked up by the existing platforms and

“Almost all of the less risky highway projects have already been acquired by these institutional platforms, who are now leveraging their O&M (operations and maintenance) skills to acquire more challenging operational assets, which are currently available," he said.

Since all of the above requires a huge investment in time and cost, I expect most of the new investors to directly partner with these institutional platforms rather than re-inventing the wheel and create platforms of their own, added Lakhanpal.

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