Two sweeping reforms likely in debt-ridden NHAI's HAM framework

Authority plans to slash developer upfront payment, reduce timeline for financial closure

Debt-ridden National Highways Authority of India (NHAI) is looking to introduce two major reforms in its hybrid annuity model (HAM) of highway contracts. This move would not only increase the basket of projects being offered but also ease the financial pressure on the authority.

Sources said NHAI is planning to reduce the upfront payment to road developers by at least 50 per cent. This is because it can award more projects with the same budget in hand. It is also looking to bring down the timeline for financial closure of HAM projects, in order to avoid delays in highway construction.

Under the HAM framework, the Centre pays 40 per cent of the project cost as “construction support” while developers arrange the remaining 60 per cent. This gets repaid to them via annuities.

NHAI is drafting a plan to slash upfront payments to developers to 10-20 per cent of the project cost, according to a letter by the authority accessed by Business Standard. 

To explore the feasibility and challenges of this route, it has invited stakeholders for a consultation on Friday. The proposal is currently being examined for select projects and the consultations will focus on setting qualification standards for these projects.

According to industry estimates, more than 80 per cent of highway projects awarded in the recent past come under HAM.

According to NHAI, the proposal aims to widen the public-private-partnership (PPP) ecosystem and increase the pace of highway development. Lower upfront payments would allow it to offer more projects with the same funds.

Experts said the model would also allow for large payments to be fragmented and deferred. This is because they would be subsumed within the annuities, easing near-term cost pressures for the apex highways authority.

“This model will also provide comparable returns on a higher capital base for concessionaires and financial institutions,” NHAI said in the letter.

The second proposal in the works by NHAI is to reduce the financial closure deadline from the current 150 days. This often leads to delays in financing and consequently, completion.

NHAI plans to award 6,500 kilometres (km) of highway projects this fiscal year.

According to the ministry of road transport and highways’ (MoRTH’s) plans, the flagship Bharatmala programme alone would account for 13,000 km of highway contracts awarded by FY24.

The move to reform HAM comes at a time when increasing costs of construction coupled with its declining pace is putting pressure on the debt-laden NHAI. This is especially during the last one and a half years.

The cost of Bharatmala is also doubling to Rs 10.63 trillion. So, experts believe that non-budgetary interventions are mandatory for MoRTH to successfully execute its plans. The MoRTH is eyeing to expand the national highway network by 60,000 km in the next three years. 

“One can expect resistance from financial institutions and developers, as they will not be comfortable with the proposed framework. Many of them are already stretched thin when it comes to working capital. It’s unlikely they’d be willing to let go of the safety net of an upfront 40 per cent payment,” a Mumbai-based sector expert said.

While the ministry has repeatedly maintained that NHAI’s debt levels are sustainable, the Centre’s budgetary allocation to the authority tells a different story.

With more than Rs 3.5-trillion of debt, NHAI was allocated a record Rs 1.34 trillion in the Union budget. This is widely understood to be the Centre’s intervention to curtail NHAI’s market borrowings.

Changes on the cards

1. NHAI plans significant cut in upfront payments to hybrid annuity model (HAM) contractors from 40% of project cost to 10-20% (for select projects)
2. Seeks reduction in the financial closure deadline, which is currently 150 days, causing construction delays
3. 80% of highway projects by NHAI were awarded under HAM
4. NHAI has sought stakeholder feedback on project selection criteria, and consultation meet on September 30
5. Experts say the sector and financial institutions may be uncomfortable by the steep reduction in payments