Govt allows easier exit from hybrid annuity highway projects under new MCA

The revised model concession agreement introduces harmonious substitution for stuck HAM projects and clarifies compensation for delays attributable to the authority

The Ministry of Road Transport and Highways has updated the model concession agreement (MCA) for hybrid annuity model (HAM) projects, allowing an easier exit for stuck projects through a “harmonious substitution” clause.

 

On Monday evening, the ministry updated its MCA — the standard document for every PPP project — to allow the concessionaire to fully replace itself or equity partners prior to formal default termination.

 

HAM is a popular model for the Centre, as it allows de-risked private investment. Under this, the authority pays 40 per cent of the project cost upfront and pays the remaining amount in annuities with interest.

 

The plan is in line with the government’s vision to reduce litigation in road projects, experts say. Highways are among the most litigated large-value public assets.

  

Last month, the ministry introduced a similar clause for Build-Operate-Transfer (BOT) Toll projects, which are far riskier. Players say that the move makes highway projects more predictable.

 

There are three circumstances where this exit clause can be invoked — if an uncured authority default (land/clearances) delays the project, the concessionaire fails to infuse equity or mobilise resources, or if, after the commercial operations date (COD), the concessionaire seeks to exit. 

 

The move prevents abrupt project abandonment and provides a smooth transition without costly litigation, said an executive with a private highway operator.

 

Moreover, the new MCA also lays down guidelines for local content requirements in line with regulations by the Department for Promotion of Industry and Internal Trade of the commerce ministry.

 

The government has also clarified a formula for payments to be made in case of delays on the part of the authority (in this case, NHAI). A prolongation cost will be 8 per cent of the value of incomplete work with respect to the delay.

 

According to experts, it eliminates discretionary damage assessments and provides clear financial compensation for delay periods.

 

“Clearer rules on delays, risk and project continuity, combined with incentives for cleaner and smarter construction technology, can strengthen investor confidence while raising the standard of execution on the ground. The next evolution of HAM is not just about who carries the risk; it is about making that risk more predictable and the execution more intelligent,” said Zafar Khan, President of Highways Investor Association and ED and Joint CEO at Vertis Infrastructure Trust.

 

However, the government has stuck to its resolve of avoiding arbitration in HAM contracts too, much to the ire of developers who had expressed opposition when the same move was undertaken for BOT Toll projects.

 

The new contract has also made a few changes which may trigger some debate, said Kuljit Singh, partner and infrastructure leader at consulting firm Ernst and Young.

 

These include providing for more conditions for approving change in ownership, such as no termination or damages notices and lender approval, among others, he added.

 

The issue stems from the fact that any change in ownership currently requires approval from NHAI, which is a lengthy affair, often taking over 10 months — this entails bureaucratic control and uncertainty. Now, while the MCA has codified conditions for approving the change in ownership, sector participants worry that the addition of clauses may tighten bureaucratic control in these crucial transactions.