The Ministry of Road Transport and Highways (MoRTH), vide office memorandum dated 10-Nov-20, introduced a series of changes to Model Concession Agreement ("MCA") for PPP projects tendered in the roads sector in India under the Hybrid Annuity Model ("HAM"). These changes were introduced in consultation with the industry experts; and is expected to give a boost to investor confidence and interest in implementation of HAM road projects in India.
In this article, YOG INFRA provides a detailed analysis for these changes; and their impact on the financial projections for such projects.
A case study of “Project Highway” is used to explain the impact of various changes made to the MCA for Hybrid Annuity Projects in India.
Case Study Assumptions:
ABC Constructions (“Concessionaire”) has won the bid to develop “Project Highway” under the HAM model; and the below list includes provides key assumptions which will typically be included as part of financial model preparation by any Concessionaire for a HAM PPP project in roads sector.
A few assumptions are highlighted in color since these will need to be additionally assumed as a result of changes to MCA.
[Rs. - Indian Rupees; Cr. - Crores}
The implication of various changes in MCA has been illustrated using the case study of Project Highway. Such illustration will enable Concessionaire to understand the financial impact on their existing or future projects.
1 – Change in Ownership
Erstwhile provision - ABC Constructions to hold minimum 26% of issued and paid-up equity during construction period and 2 years thereafter. Assuming a total equity investment of Rs. 120 cr. in the project, ABC Constructions would need to maintain equity investment amount of minimum Rs. 31.20 cr. till 31-Jan-26
Updated provision w.e.f. 10-Nov-20 - ABC Constructions to hold minimum 26% of issued and paid-up equity during construction period and 6 months thereafter. ABC Constructions to maintain equity investment amount of minimum Rs. 31.20 Cr. till 31-July-24 i.e. it will be able to recycle the equity capital of Rs. 31.20 cr. for another project 6 months after CoD.
YOG INFRA view – This change is beneficial especially for EPC players who have a strong project development capability; and would prefer to exit the project post commissioning to continue to build other such road projects.
2 – Cost of shifting utilities during construction
Erstwhile provision – Cost of shifting of utilities (like electric lines, water pipes, telephone cables) to be reimbursed by Authority to Concessionaire. As per the case study example, ABC Constructions to be reimbursed Rs. 10 cr. over an above the Bid Project Cost.
Updated provision w.e.f. 10-Nov-20 – All costs related to shifting of utilities is considered as part of Bid Project Cost. As per the case study example, Rs. 800 cr. is assumed to include Rs. 10 cr. cost to be incurred for shifting utilities.
YOG INFRA view – This change may require additional expense on part of Concessionaire to do a detailed analysis for estimation of such costs of shifting of utilities; and incorporate the same into the Bid Project Cost. An accurate estimate would be needed to avoid under or over bidding for any project.
3 –Reimbursement for Maintenance During Construction Period
Erstwhile provision – No specific provision.
Updated provision w.e.f. 10-Nov-20 – If the scheduled completion date gets extended due to delay attributable solely to the Authority, Concessionaire shall be reimbursed for the cost of maintenance of the project for such extended period.
YOG INFRA view– This change is beneficial to project developers and would enable them to have a better liquidity in case of delayed completion attributable to Authority.
4 – Quantum of financing for the Project
Erstwhile provision - No specific provision.
Updated provision w.e.f. 10-Nov-20 – The financial close amount for the project shall be not lower than either 1) Total Project Cost; or 2) 10% less than (Estimated Project Cost minus 40% of Bid Project Cost).
As per the definitions in MCA and the case study example,
· Total Project Cost – 60% of Bid Project Cost i.e. 60%*800 = Rs. 480 cr.
· Estimated Project Cost – 40% of Bid Project Cost = 900 – 40%*800 = Rs. 580 cr.
· Minimum amount of financial close (total debt and equity financing) = Rs. 480 cr.
YOG INFRA view – This change may require pre-bid analysis by the developers regarding their capability to raise debt finance from the banks. No minimum debt amount has been specified and developers may opt to use equity to finance part of the project; however, this will result in a higher cost of capital compared to debt finance.
5 – Payment during Construction Period
Erstwhile provision – Total 5 payment milestones during construction period; and 8% of Bid Project Cost (adjusted for Price Index Multiple) paid by Authority for each milestone i.e. total 40% of Bid Project Cost payable during construction period.
On achievement of 10% Physical Progress
On achievement of 30% Physical Progress
On achievement of 50% Physical Progress
On achievement of 75% Physical Progress
On achievement of 90% Physical Progress
As per the case study example, each milestone payment amount is 8%*800 = Rs. 64cr.
Updated provision w.e.f. 10-Nov-20 - Total 10 payment milestones during construction period; and 4% of Bid Project Cost (adjusted for Price Index Multiple) paid by Authority for each milestone i.e. total 40% of Bid Project Cost payable during construction period.
On achievement of 5% Physical Progress
On achievement of 10% Physical Progress
On achievement of 20% Physical Progress
On achievement of 30% Physical Progress
On achievement of 40% Physical Progress
On achievement of 50% Physical Progress
On achievement of 60% Physical Progress
On achievement of 70% Physical Progress
On achievement of 80% Physical Progress
On achievement of 90% Physical Progress
As per the case study example, each milestone payment amount is 4%*800 = Rs. 32cr.
YOG INFRA view – This change is a very positive development and beneficial for developers since it significantly improves liquidity of cash flows during the project construction period.
Completion Cost of the Project
Erstwhile provision – Completion cost is computed based on adjustment of Bid Project Cost at time of each of the 5 construction milestones & upon COD.
Updated provision w.e.f. 10-Nov-20 - Completion cost is computed based on adjustment of Bid Project Cost at time of each of the 10 construction milestones & upon COD.
YOG INFRA view – This change is required so that Completion Cost computation is reflective of the construction milestone payments. No impact from the cash flow perspective for developers under the base case financial model projections. .
6 – Interest Rate for Annuity Payments during Operation period
Erstwhile provision – Interest due and payable on the reducing balance of Completion Cost (due to Annuity payments during operation period) shall be equal to the applicable Bank Rate plus 3%. Bank Rate is rate of interest specified by Reserve Bank of India as per section 49 of the Reserve Bank of India Act, 1934 or any replacement thereof.
As per the case study example, applicable interest rate on reducing balance of Completion Cost payable by Authority = 6.00% + 3.00% = 9.00%
Updated provision w.e.f. 10-Nov-20 - Interest due and payable on the reducing balance of Completion Cost (due to Annuity payments during operation period) shall be equal to average of 1-year MCLR of top 5 scheduled commercial banks plus 1.25% . The Authority shall declare the list of top 5 scheduled commercial banks on 1st September every calendar year based on the balance sheet size as declared in their annual reports.
As per the case study example, applicable interest rate on reducing balance of Completion Cost payable by Authority = 8.50% + 1.25% = 9.75%
YOG INFRA view – This change is very positive development as per long time demand of this industry. Since the interest payment by developers on commercial debt is based on MCLR of the commercial bank, this move would help to mitigate the mismatch between the interest inflow and outflow for the developers during the operation period.
7 – Interest Rate on Mobilization Advance
Erstwhile provision – The rate of interest on the mobilization advance provided by the Authority to the Developer shall be equal to the Bank rate, compounded annually.
As per the case study example, applicable interest rate on mobilization advance payable by ABC Constructions = 6.00%
Updated provision w.e.f. 10-Nov-20 - The rate of interest on the mobilization advance provided by the Authority to the Developer shall be equal to the average of 1-year MCLR of top 5 scheduled commercial banks plus 1.25%, compounded annually.
As per the case study example, applicable interest rate on mobilization advance payable by ABC Constructions = 8.50% + 1.25% = 9.75%
YOG INFRA view – This change is negative development for the developers. The increase in interest rate of Mobilization Advance is very significant (compared to earlier provision). Most of the developers, especially the new entrants for developing HAM projects (like erstwhile EPC players) did make use of the Mobilization Advance provided by Authority; however, in view of the high interest cost of such amount, developers would need to ensure adequate liquidity.
8 – Termination Payments
Erstwhile provision – The termination payments, in the event of project termination during construction period, were linked with 5 payment milestones during construction.
Updated provision w.e.f. 10-Nov-20 - The termination payments, in the event of project termination during construction period, have been linked with 10 payment milestones during construction.
YOG INFRA view – This change is required so that Completion Cost computation is reflective of the construction milestone payments. No impact from the cash flow perspective for developers under the base case financial model projections. .
9 & 10 – Dispute Resolution Board
Erstwhile provision – No specific provision.
Updated provision w.e.f. 10-Nov-20 – The Dispute Resolution Board (“DRB”) would be constituted for each individual project, consisting of 3 members; of which 1 member each is selected by Authority and Concessionaire; and the 3rd member is to be selected by the first 2 members.
In the event of any Dispute between Authority and Concessionaire, failing mediation by the Independent Engineer (“IE”) or without intervention of IE, either party may require any dispute to DRB; and the decision of DRB shall be binding on both parties unless the same is revised/ modified in a conciliation/ arbitral tribunal
YOG INFRA view – This change is a positive development since it provides an additional layer of mediation in the event of any Dispute before the matter being referred to conciliation/ tribunal. However, this will result in additional administrative time & effort for such DRB constitutions for each individual HAM project in the country.
11 – Conciliation
Erstwhile provision – Conciliation to be done by referring of the Dispute to the Chairman of Authority and the Chairman of Board of Directors of Concessionaire, which shall attempt to amicably resolve the same. In case such conciliation is not successful, either party may refer the Dispute to arbitral tribunal.
Updated provision w.e.f. 10-Nov-20 – In case DRB is not able to resolve any Dispute among parties, each party will explore conciliation by the conciliation committees of independent exports set up by the Authority in accordance with the procedure decided by the panel of such exports and modified by the Authority on its website including its subsequent amendments. In case such conciliation is not successful, either party may refer the Dispute to arbitral tribunal.
YOG INFRA view – This change is a positive development since an attempt at conciliation will be made by an independent third-party. In case the conciliation is successful, this will result in significant savings on legal costs for both the Authority and Concessionaire.
12 – Performance of Obligations during Dispute
Erstwhile provision – No specific provision.
Updated provision w.e.f. 10-Nov-20 – Notwithstanding any dispute between Authority and Concessionaire, each party shall proceed with the performance of respective obligations, pending resolution of such dispute as per the process explained earlier.
YOG INFRA view – This change has been made to continued smooth construction or operation of the Project in case of any Dispute; however, the implementation of this provision will be a challenge by either Party.
13 – Definition of “Change in Ownership”
The definition of “Change in Ownership” has been updated as per the first change, already explained earlier.
14 – Validity Period of Bank Guarantee for Mobilization Advance
Erstwhile provision – The validity of Bank Guarantee for Mobilization Advance shall be 60 days after the expected date for 5th payment milestone during the construction period.
Updated provision w.e.f. 10-Nov-20 - The validity of Bank Guarantee for Mobilization Advance shall be 60 days after the expected date for 10th payment milestone during the construction period.
YOG INFRA view – This change is required so that validity period is reflective of the construction milestone payments. No other impact.
For more information about these changes, the exact language of various clauses in MCA please click here for the MoRTH notification.
Please refer to the updated MCA document for HAM projects on the below link
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