How The Maharashtra State Government Changed The Game For HAM Projects In India

HAM Project Model In India: Brief History Of Its Introduction And Its Fundamental Constituents

Infrastructure development has been a key thrust area for successive governments in India, and road infrastructure has always been of great importance. Roads provide the foundation for a progressive economy, so to say.

In India, the road sector has come up in the learning curve after swinging widely between success and failures. The PPP-based Built Operate Transfer (BOT) model was pivotal in the development of many highways of national importance, before many of them got stuck due to issues of land clearances, litigations, issues between concessionaires and government, etc.

Then, the Engineering, Procurement, and Construction (EPC) model became the mainstay; however, that also ran in problems owed to funding issues and several other factors like the greed of concessionaries (taking orders more than what they could execute, over leveraging, fund diversion, etc.).

After this, the Central Government introduced the Hybrid Annuity Model (HAM). HAM was brought in by the Indian Government to essentially strengthen the PPP (Public Private Partnership) mode of construction of projects. Primarily, it started off with being a mix of two/three existing models – the BOT Annuity (Build Operate Transfer), BOT-Toll, and EPC (Engineering, Procurement and Construction) models.

Statistically, it has been reported that in 2016-17, the NHAI awarded HAM projects for about 2,434 km at a budget of Rs. 36,300 crore and in the year 2017-18, projects of around 3,396 km for about Rs. 76,500 crore were further awarded, as well. In the first half of 2019-20, NHAI had awarded 843 km highways and all of that was awarded through the EPC route but the NHAI was hopeful of awarding at least 2000 km worth of projects under HAM for the remainder of 2019-20.

CRISIL Research showed that of the 6,670 km HAM projects awarded by the NHAI during fiscals 2016 to 2019, a good 70-75% have achieved financial closure, most of them by large developers with a turnover of more than INR 1,500 crore. Now, the same organization reveals another interesting piece of information where it highlights the problems of the smaller players in the EPC arena, many of which essentially going from EPC to HAM for the first time, “were struggling to secure funding after bidding aggressively, and banks tightening capital requirements. The upshot has been a deceleration in the pace of financial closures.”

Even though the HAM model was expected to fast-track the development of these projects as an improvement over the usual BOT model, there were some aspects where the model wasn’t efficient and needed to be relooked at.

Under the existing HAM model (majorly from NHAI), the contractor (the company developing the project) was to be paid during the construction of the project on milestone basis, and the contractor also got to manage the developed road stretch for the next 12-13 years under an O&M contract.

Standard NHAI HAM model was for 15 years, where it included a construction period of 2-3 years and 40% of the cost was paid by the Government as per the milestones of project completion, and the remaining 60% of the cost would be paid as bi-annual annuity over the next 12-13 years~ along with interest and O&M fees.

When this model was introduced, the immediate response from lenders was timid, as lenders were apprehensive about the Government’s allocation and the budgetary support for the project owed to the tenor of the project being 12-13 years, which is very long.

This led to difficulties in achieving financial closures of the project, though later many HAM projects under NHAI were financed.

Maharashtra State Government (PWD) HAM With A Twist

Wary of the relatively low success of NHAI HAM, The Maharashtra state government also introduced HAM within its state for road construction and as an added comfort decided to differentiate with some salient features, which were in contrast of the NHAI HAM model. These features include:

  • 60% of the cost being paid by the state government during the construction period (5 installments of 12% each for physical progress of the project between 2-3 years) vis a vis 40% in case of NHAI
  • Remaining 40% would come as bi-annual annuity over the tenor of 10 years
  • Parking of 50% of governments contribution upfront in an escrow account
  • Apart from this, the contractor would be paid interest on the 40% portion and the said contractor will be responsible for the operations and maintenance over the next 10 years, for which it will be paid another fixed amount

Keeping the above table as context, let’s look at an example: Assuming for a project of INR 100 crore, INR 60 crore is paid during the construction phase (the math comes out to be 5 installments of INR 12 crore each) by the government on milestone basis and the remaining INR 40 crore is paid as bi-annual annuity over the next 10 years.

Added to that, interest is paid on the INR 40 crore (on a reducing balance basis) as well as an added amount is paid for operations and maintenance, where the said amount is bid by the contractor.

Now, coming to the funding of the project: If the project is to be completed in 2 years, the Government will pay up INR 60 Crore. The remaining INR 40 crore must be initially brought in by the contractor, through a mix of debt and equity

Challenges in Financial Closure Of HAM Projects

Our team recently came across a similar project of the Maharashtra HAM model for a reputed EPC player in India.

We navigated through this process and figured out the apprehensions about this project model among lenders, where the primary reasons included:

  • Maharashtra’s PWD department’s less-than-impressive track record of payments
  • Newness of the model with lack of information about it
  • Huge capital commitment and concerns regarding its fulfilment

Owed to these factors, financial closures weren’t being achieved in HAM projects announced by State PWD with ease.

Ring Fencing Of The Deal

Now, it is interesting to note that previously, as reported, the Maharashtra state government had signed an MoU with the few PSBs, wherein the said PSBs had made a commitment to fund the allocated INR 2000 crore for the HAM projects in the state

The state government’s proactive approach and willingness to offer additional comforts to lenders though were largely not known. We planned for free interaction between borrower, PWD and lenders to develop a model where each party has the requisite comfort and the borrower is ring fenced in terms of capital commitment towards the project, with an eye on timely execution.

The Government’s commitment that 60% of their contribution would be parked in an escrow upfront in two tranches (The first tranche of the 30% would be parked with the lender upfront, and the next 30% will be given to the lender on completion of the 2nd milestone.). This was a huge comfort to lender in terms of equity risk and budgetary support to the project.

Further, there was a significant change in payment milestones. The prior/NHAI arrangement called for lender payment when the project was completed 20%, 40%, 60%, 75% and 90% whereas the state government HAM had the milestones laid out at 10%, 30%, 50%, 75%, and 90%. This change helped in easing the cash flows and gave added comfort to lenders. It also went on to highlight the positive intent of the state government in executing the projects.

The credit check points we ticked with included the following:

  • 60% contribution from the Government, and that too upfront
  • Eased out milestone parameters for early inflow of contribution from government
  • 30% debt which improved the debt-equity matrix substantially
  • Upfront deployment of 10% of promoter’s contribution

This gave a comfort to lenders since debt would flow only at 2nd milestone with entire promoter’s contribution already deployed and state’s contribution parked in escrow. The chain of government payments and debt would then repeat at every step of milestone. That marked the stark difference between how projects under NHAI HAM were executed as compared to how Maharashtra State Government HAM were executed.

To summarize the said observations, Maharashtra state government’s HAM project model has been exemplary, if we categorically look at state-wise development projects in the infrastructure sector. Given the successful execution of more such projects (ideally so after the current novel coronavirus a.k.a. COVID-19 pandemic), it can surely lead to other state governments picking up the drawing board and coming up with models of their own to boost their infrastructure.

Now, while it is important to note that NHAI HAM can’t be ignored either for central government projects, there are lessons to be learnt and they could be implemented in the said model as well. For large scale projects, this could be a boon in looking at fast-tracking their completion and ensuring the cash flow isn’t hindered by any niggling factors.

As the wait-and-watch game continues for India to see when the lockdown finally opens and projects come back into execution mode (especially after the significant labor loss, which is a whole other topic of discussion), one can surely hope that this sort of privatized development can lead to bigger examples in the future.

Written By

Nimit Arora

Nimit currently leads Coinmen Capital Advisors as an Assistant Manager, with over 3 years of experience in debt syndication and structured finance.

Follow him on LinkedIn, here.