More tranches of govt equity under HAM soon in highway projects

Under the new proposal, firms will give bank guarantees every year against anticipated govt payment for that year

The Union government may soon unveil a new set of norms for the hybrid-annuity model (HAM) contracts in order to promote fresh private investment in highways through this route.

HAM contracts are projects that are partially funded by the central government. The government pumps in 40 per cent equity in the projects and the remaining finances are arra­nged by the developer through a mix of debt and equity.

It is learnt that the funds that the government releases to companies under HAM would now be given in smaller tranches but at higher frequency. 

For instance, if a company was getting five equal instalments amounting to 40 per cent of the project cost, it would now be 10 equal instalments, though the overall amount would be the same.

“These smaller instalments mean a comfortable liquidity situation for the company and also reduction in the developer’s working capital requirements,” a senior official in the know told Business Standard.

There could also be a relaxation in providing bank guarantee by the company. 

Currently, developers furnish bank guarantees, against the amount to be released by the government for the entire duration of the project. 

Under the new proposal, the construction firms would give bank guarantees every year against anticipated government payment for that year. Payments are made only after bank guarantee is submitted. 

While this ensured that the operator reaches the milestones, the change to annual guarantees would de-risk the financiers. “Annual bank guarantees by the companies would give the lenders confidence on the outcome of the project,” an NHAI official said.

The proposal to make HAM projects more attractive was approved by an inter-ministerial panel comprising the Department of Expenditure, Department of Economic Services, Department of Financial Services, NITI Aayog, Ministry of Law and Justice, and Ministry of Road Transport and Highways. The new norms will be notified by the ministry soon.

The demand for the proposal came from the various industry lobby groups, including the National Highways Builders Federation (NHBF). 

Besides this proposal, the government is planning to tweak certain other norms.

To reduce the risk attached to the road construction projects and cushion the banks from the Covid-19 crisis, the Centre is contemplating pooling the marginal cost of funds-based lending rate or the MCLR for such contracts. MCLR is an internal reference rate for banks fixed by the Reserve Bank of India.

The changes essentially mean pooling of MCLR of five or six lenders and arriving at an average rate to be offered to the construction companies, a move that would distribute the risk attached to the project to multiple banks as opposed to one bank right now.

The proposal to make HAM more attractive comes close on the heels of similar changes in the norms for BOT or build-operate-transfer projects.

In February, the National Highways Authority of India (NHAI) came out with new BOT guidelines to encourage private participation.

The thought behind changing the guidelines was the exit of large companies. These companies had the appetite for such projects but shied away from them due to delayed returns on investment, rigid concession agreements, and legal disputes with the government.

The new model concession agreement states if there is a default, the NHAI and the concessionaire can ask the lender or banks to invite, negotiate, and procure other offers to take over the contract.