The Ministry of Road Transport and Highways (MoRTH), vide office memorandum dated 23-May 22, 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 will primarily aim to ensure that the awarded bidders have an incentive to operate the project for the full concession period, and avoids cross-allocation of operating costs on to the construction cost. Also, clarity has been provided on treatment of GST for O&M payments during the operation period. We believe that this will bring more visibility to bidders on their returns due to consistent financial, commercial, tax and accounting assumptions for bids on HAM road projects in India.
In this article, YOG INFRA provides a detailed analysis for these changes, and their impact on the financial projections & bid strategy for such projects.
We have used 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 submitted the below bid to develop “Project Highway” under the HAM model. The list below 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.
[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 – Changes in Bidding Process
Erstwhile provision- ABC Construction bid would be evaluated based on Bid Price. Such Bid price was computed as summation of NPV of Bid Project Cost during concession period and NPV of O&M cost during O&M period.
Updated provision w.e.f. 23-May-22 – ABC Constructions bid now be evaluated based on the Bid Project Cost (Rs. 800 Cr.) and this will be the sole criteria for bid evaluation.
YOG INFRA view – This change brings simplicity in the bid evaluation of HAM projects. Also, this will disincentivize bidders to do a cross-allocation of O&M expenses on upfront bid project cost payment.
2 – Changes in O&M Payments
Erstwhile provision- ABC Constructions will receive Rs 5 Cr in two equal biannual instalments, adjusted for Price Index (from the bid due date), as O&M payments from NHAI.
Updated provision w.e.f. 23-May-22 – ABC Constructions will receive following amount for O&M payments as per different scenarios.
It is also important to note below:
All amounts payable for maintenance shall be adjusted one account of variation of Price Index.
Bid Project Cost used for calculation of O&M payments shall be adjusted to the extent of change of scope and reduction in scope, but shall not include any price adjustments in pursuance of variation of Price Index
O&M payments will be subject to change in scope of the project of the concessionaire under Article 16 of the Concession Agreement
The different possible scenarios for O&M payments and relevant computations are provided below:
CASE 1: Constructions of a flexible perpetual pavement including structures (without renewal layer)
No maintenance charges shall be paid for the first year;
0.40% of the Bid Project Cost each for the second, third and fourth year;
0.60% of the Bid Project Cost each for the subsequent years till laying of the renewal layer or end of concession period, whichever is earlier.
CASE 2: Construction of a flexible perpetual pavement including structures with two (2) renewal layers, first at 7th year and second at 11th year:
The requirement for the renewal layer shall be worked out based on the survey and investigation of the existing pavement and the cost of such renewal works shall be made separately to the Concessionaire @ 2.4% of Bid Project Cost.
After laying of the renewal layer, the Concessionaire shall be paid
0.40% of the original Bid Project Cost each for the next four years; and
0.60% of the original Bid Project Cost each till laying of the second renewal layer or end of concession period, whichever is earlier.
After laying of the second renewal layer, the Concessionaire shall be paid @ 0.40% of the original Bid Project Cost each for the remaining years till the end of concession period.
[Renewal layer timings are highlighted in color]
CASE 3: Construction of a rigid pavement with 10 years Maintenance Period including structures:
For rigid pavement with 10 years Maintenance Period including structures:
no maintenance charges shall be paid for the first year;
0.20% of the Bid Project Cost each for the second, third & fourth year,
0.40% of the Bid Project Cost each for fifth, sixth, seventh & eighth year,
0.60% of the Bid Project Cost each till the end of concession period
CASE 4: For stand-alone Bridge/ Tunnel works:
The concessionaire shall be paid
No maintenance charges shall be paid for the first year;
0.20% of the Bid Project Cost each for the next five years,
0.40% of the Bid Project Cost each for the remaining years till the end of concession period.
YOG INFRA view - This change will provide visibility to bidders regarding O&M payments during the term of the project. Also, this provides a broad guideline for O&M benchmarks which will be beneficial for bidders while preparing financial projections for bid submission for HAM road PPP projects.
3 – O&M Payments to be inclusive of Taxes
Erstwhile provision – No such provision. However, the bids were called exclusive of GST and hence the O&M cost quoted by bidder as part of bid was also assumed as exclusive of GST.
Updated provision w.e.f. 23-May-22 – All amounts for the performance of contractors’ maintenance obligation shall be inclusive of all taxes.
YOG INFRA view – This changes provides clarity regarding the tax assumptions to be made in the financial projections for the HAM road PPP projects
For more information about these changes, the exact language of various clauses in MCA please click here for the MoRTH notification.
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