With the govt addressing concerns pertaining to its execution, the model is expected to draw road developers once again
The introduction of investor-friendly changes in the model concession agreement (MCA) for highway building under the hybrid annuity model (HAM) has been welcomed by the industry, with experts saying the route is likely to become attractive for developers once again.
Among the measures taken to revive interest in HAM, which came into existence in 2015-16, is the government’s decision to double the frequency of payment of upfront construction support (40% of the project cost) to 10 from five earlier. The move to change the way interest is calculated on annuities paid to developers and reduce the equity lock-in period post the construction period to 6 months from two years are other positives expected to boost investor interest.
As is known, HAM is a kind of win-win model for both the government and the concessionaires; unlike in the Engineering Procurement and Construction (EPC) model, the government does not need to bear the entire cost of construction in HAM; and a developer’s skin in the game is far less in HAM than under the Build-Operate-Transfer (BOT) model. However, the share of HAM in the highway project awards by the National Highways Authority of India (NHAI) has been sliding, falling from a peak of 55% in 2016-17 to 28% in 2019-20.
As part of the new rules, the first tranche of upfront payment will be released after 5% of progress in construction work and the second one after 10% progress. Similarly, the last instalment of the upfront payment will be disbursed after 90% of physical progress has been achieved. The measure will help concessionaires better manage their working capital needs and should also provide more comfort to lenders in the event of termination.
For the remaining 60% of the project cost paid to the developer as annuities over the operations period along with interest thereon, the new rules say interest shall be due and payable on the reducing balance of completion cost at an interest rate equal to the average of one-year marginal cost of funds-based lending rate (MCLR) of the top five scheduled commercial banks plus 1.25%. Earlier, the interest rate was linked to the Reserve Bank of India (RBI) bank rate plus 300 basis points.
Commenting on this measure, Crisil’s Akshay Purokayastha says, “linking the interest payable to the MCLR instead of the RBI bank rate is a major positive. Reducing the equity lock-in period to 6 months post the construction period rather than two years is another positive as it will lead to better utilisation of capital.”
Rajeshwar Burla of ICRA has said, “recent changes in MCA with a shift to MCLR from bank rate earlier for computing interest on annuities is a very positive development. The interest on annuities for HAM projects is sizeable, amounting to around 45% of overall inflows during the concession period. Until now, the low bank rate reduced the overall inflows for a HAM project. The second problem was related to delayed interest rate transmission. The transmission of reduced interest rates happened with a lag for the project loan. This is also evident from the widening difference between weighted average lending rate and RBI bank rate in the current year.”
Mohit Kumar, senior vice president, DAM Capital, says the new MCA has incorporated all the concerns that had cropped up since the implementation of HAM in 2016. “The changes are likely to result in a better environment – less working capital need, faster dispute resolution, and higher interest payment on annuities. All in all, it’s very positive for road developers,” he says.