HAM projects to help highway construction pick up pace

17 Nov 2020 CW Staff

As part of the measures taken to revive an interest in HAM, which came into existence in 2015-16, the government has decided to double the payment frequency from 5 to 10 for upfront construction support, which is around 40% of the project cost. This move was made to create a change in interest calculations for the annuities that are paid to the developers. It is also meant to decrease the lock-in equity period to six months from the initial two years time frame to help increase the investor’s interest.

When it was introduced, HAM was hailed to be a win-win model for the concessionaires and the government. In the engineering, procurement, construction (EPC) model, the government covers the entire cost of construction. A developer’s skin in the game is far less in HAM than under the Build-Operate-Transfer (BOT) model. Despite its stated advantages, HAM’s share has been decreasing in the highway projects awarded by the National Highways Authority of India (NHAI), from 55% in 2016-2017 to 28% in 2019-2020.

Based on the new rules, the first portion of upfront payment will be made after 5% of the construction work is done, and the second portion after 10% of the work is done. Following the same pattern, the last portion will be made after 90% of the work has been achieved. This new rule will help concessionaires manage their working capital better and will also bring comfort to the lenders in case of termination.

The new rules will also apply to 60% of the project cost that will be paid to the developers as revenue over the work period as well as interest. These rules state that interest will be due and have to be paid on the decreasing balance of the cost completed. The rate of interest for this will be on par with the one–year marginal cost of funds-based lending rate (MCLR) that the top five scheduled commercial banks follow as well as a 1.25% increase.

CRISIL believes that linking the interest to be paid with the MCLR as opposed to the RBI bank rate will have a positive effect. He also said that reducing the equity lock-in period to 6 months instead of the original two years after the construction period is another positive impact which will lead to better use of the capital.

ICRA also believes 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 sizable, 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.

There have been new changes in the model concession agreement (MCA) in an attempt to make it more investor-friendly. These changes were made for highway building under the hybrid annuity model (HAM). Experts say the changes will help rejuvenate interest among developers. As part of the measures taken to revive an interest in HAM, which came into existence in 2015-16, the government has decided to double the payment frequency from 5 to 10 for upfront construction support, which is around 40% of the project cost. This move was made to create a change in interest calculations for the annuities that are paid to the developers. It is also meant to decrease the lock-in equity period to six months from the initial two years time frame to help increase the investor’s interest.When it was introduced, HAM was hailed to be a win-win model for the concessionaires and the government. In the engineering, procurement, construction (EPC) model, the government covers the entire cost of construction. A developer’s skin in the game is far less in HAM than under the Build-Operate-Transfer (BOT) model. Despite its stated advantages, HAM’s share has been decreasing in the highway projects awarded by the National Highways Authority of India (NHAI), from 55% in 2016-2017 to 28% in 2019-2020. Based on the new rules, the first portion of upfront payment will be made after 5% of the construction work is done, and the second portion after 10% of the work is done. Following the same pattern, the last portion will be made after 90% of the work has been achieved. This new rule will help concessionaires manage their working capital better and will also bring comfort to the lenders in case of termination. The new rules will also apply to 60% of the project cost that will be paid to the developers as revenue over the work period as well as interest. These rules state that interest will be due and have to be paid on the decreasing balance of the cost completed. The rate of interest for this will be on par with the one–year marginal cost of funds-based lending rate (MCLR) that the top five scheduled commercial banks follow as well as a 1.25% increase. CRISIL believes that linking the interest to be paid with the MCLR as opposed to the RBI bank rate will have a positive effect. He also said that reducing the equity lock-in period to 6 months instead of the original two years after the construction period is another positive impact which will lead to better use of the capital. ICRA also believes 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 sizable, 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.

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