Road Sector – Hybrid Annuity Model – Model Concession Agreement

Harish Kant Kaushik

Harish Kant Kaushik NIBM, Pune, Nov 2019

PPP in Roads - The Growth Story

2009- : BKC Committee Report

(Standardisation of MCA]

2001: 2005:
BOT Annuity based projects start MCA Introduced
[ To promote PPP]
1998:
100% FDI approved
Cess on fuel introduced 2000:
1st BOT Toll based project starts
Central Road Fund Act [Dedicated fund
for NHDP]

1995:
1988: Declaration of road sector as Industry [ To facilitate borrowing]
NHAI Act passed NHAI operational [ To streamline process and implement NH
development]

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Modes of awarding Projects
Modes

Cash / EPC
BOT/ DBFOT
Contract

Toll Annuity based

Based

Bid Criteria (AnnuityProjects)

 Considered where Traffic is not at all sufficient to cover
Grant investment in the desired period.

 Granted through a tender process in which the lowest annuity requested is

used as a bidding criteria.
Premium
 The granting authority retains the traffic risk, since it collects toll revenues

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Risk Allocation
Risk shared in EPC Mode Risk shared in BOT / Annuity Mode
Type of Risk Party Type of Risk Party
Funding Arrangement By Govt Funding Arrangement By Private Player
Financing Risk Government Financing Risk Private
O & M Risk Government O & M Risk Private
Revenue Risk Government Revenue Risk Private/Govt

Risk shared in Hybrid Annuity Mode

Type of Risk Party
Funding Arrangement By Govt & Private Player
Financing Risk Shared between Govt and Private Player
O & M Risk Private

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Revenue Risk Government
 Overview of the model

Project Cost- Bid parameter

1. Annuity payments (biannually) for
40% of Project Cost 15 years
(Construction 2. O&M payments
Support) by Govt. 3. Interest payments (on reducing
balance @ Bank Rate + 2%)
COD

Hybrid Annuity Project

Toll collection O&M by

60% of Project Cost by Govt Concessionaire
arranged by
Concessionaire for
Financial Close

Construction Period O&M Period

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Award Process for BOT/ DBFOT Projects
RFQ RFP

Procedure for award of concession is two-stage bidding process – RFQ and RFP

RFQ – Prequalification based on technical and financial expertise.

Technical qualifications
Threshold Technical Capability – Company/ consortium should have, over the last five
financial years executed projects (PPP or EPC) in Highway or Core sector wherein cost of
development is equal to Estimated Project Cost of NHAI

Financial qualifications
Company or consortium should have a minimum Net Worth equal to 25% of the project cost
estimated by NHAI

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Bid Criteria (HAM Projects)
Private player undertakes to develop and maintain Site & aims to recover costs (alongwith
expected returns thereon) out of collection of Tolls
Test of eligible Bidder – 1. Technical Capacity, 2. Financial Capacity

Bid criteria
a. Technical Qualification – As per Bid Document & GoI guidelines
b. Financial bid - basis of Lowest Assessed Bid Price (summation of i) & ii):
i) NPV of Bid Project Cost during Concession Period
ii) NPV of O&M Cost during O&M Period
(Discount Rate for NPV calculation @Bank Rate on the date of bidding +3%)
Estimated Project Cost – Estimated by Concession Authority (internal purposes)
Bid Project Cost – estimated by Bidder for bid purposes
(if Bid Project Cost >10% lower than Estimated Project Cost, then successful bidder shall furnish
additional PBG for adhering to standards and timely completion)

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 Overview of the model

Hybrid Annuity Model with Construction Period Capital Support

Major Aspects

Finance related
Other CA provisions
A. Project Cost
A. Conditions Precedent
1. Construction period
B. Performance Security
 Capital support
C. Right of Way
2. O&M Period
D. Financial Close
 Annuity
E. Termination
 Interest
B. O&M expenses

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 Finance related Concepts of Project Cost
Appointed Commercial
Bid Date Date Operation Date

Construction Phase O&M Phase

Project Cost
• Amount quoted by the Selected Bidder (shall include civil construction cost, physical and
price contingency, inflation-indexed, risk premium and financing cost)

Example
• Rs. 1,000 crore (amount specified in the Bid of the selected Bidder at the time of Bid- 1st
January 2019)

Used as a bidding parameter for selection of Concessionaire

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 Finance related Concepts of Project Cost- Example

• Estimated Project Cost- Rs. 1,000 crore

Bid Date
• Price Index preceding the Bid Date (1st January 2019) is 200

• Price Index immediately preceding the Appointed Date (1st July 2019) is
Appointed Date 205
• Opening Project Cost = Rs.1025 Crore

• Price Index preceding Invoice date (1st September 2020) = 210

Construction
Phase • First Installment (Cash Support) = 8% (1/5th of 40%) of Project Cost indexed
by the Price Index Multiple = Rs. 80x1.05= 84 Cr

Commercial • Price Index preceding the COD (1st December 2021) is 240
Operation Date • Completion Cost = Rs.1200 Crore

• Project Bid cost is Rs. 800 Crore

• Estimated increase by 15% is Rs. 120 Crore on account of physical and price
Total Project contingency, risk premia and financing cost
Cost
• Total Project Cost = Rs. 920 Crore minus 40% of Project Cost (i.e Rs. 1000
Crore) = Rs. 520 Crore

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 Capital Support

Capital Capital Support:

Support
• 40% of the Project Cost provided by the Authority to the
Concessionaire during the construction period in the form of
Mobilization
Advance ‘Construction support’
• ‘Construction support’ to be disbursed in 5 equal installments
of 8% each
Annuity • Timing of the above disbursement linked to percentage of
Payments project cost expended by concessionaire and physical
progress as to be defined in Concession Agreement
Interest
Payments

O&M
Payments

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 Timelines – aspects

Bonus on early completion

• In case Concessionaire achieves COD more than 30 days prior to Scheduled

Completion Date, the Authority shall pay the Concessionaire a bonus @ 1% of the
Completion Cost ( Rs. 12 crores*) for every month by which COD precedes the
Scheduled Completion Date

Damages for Delay in Completion of Construction

• If COD does not occur prior to the 91st day after the Scheduled Completion
Date, Concessionaire shall pay damages to the Authority @ 0.1% of the
amount of Performance Security ( Rs. 1.56 lakhs in this case*) for each day
delay until COD is achieved or (Rs. 46.80 lakhs in this case*) for a month of
delay.

• Estimated Project Cost - Rs. 1,000 crores and Bid PC of Rs. 520 crores
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 Key Concepts - Concession Agreement

Conditions
Precedent For Authority
• Procured all Applicable Permits relating to environmental
Performance protection, and conservation in respect of at least 90% of the
Security land required

Right of • Procured forest clearance for and in respect of at least 90%

Way of the land required, save and except permission for cutting
trees
Financial
Close

Termination

Others

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 Key Concepts - Concession Agreement

Condition Damages for delay by the Authority

Precedent • Damages @ 0.2% of the Performance Security for each
day’s delay until the fulfilment of Conditions Precedent
Performance subject to a maximum of bid security
Security
Damages for delay by the Concessionaire
Right of • Damages @ 0.3% of the Performance Security for each
Way
day’s delay until the fulfilment of Conditions Precedent
subject to a maximum of bid security
Financial
Close
Deemed Termination upon delay
• Concession Agreement terminated by mutual agreement of
Termination
the Parties if the Appointed Date does not occur before the
1st anniversary of the date of Agreement
Others

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 Key Concepts - Concession Agreement

Condition Performance Security Amount

Precedent • Performance Security approximately 3% of the Total Project
Cost (1.56% of Project Cost in this case i.e. Rs. 15.6 crores )
Performance Earlier 5% of estimated project cost. (For a project having
Security estimated project cost of Rs. 920 crores, Performance
security would have been Rs. 46 crores)
Right of Appropriation of Performance Security
Way
• After encashment and appropriation from the Performance
Security, the Concessionaire shall within 15 days, replenish
Financial
Close the performance security to its original level

Release of Performance Security

Termination
• Performance Security to be released after 1 year from
Appointed Date/ earlier on spending the 30% of the Total
Others Project Cost

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 Key Concepts - Concession Agreement

Condition Deemed Performance Security

Precedent • After release of the Performance Security, a substitute
Performance Security for a like amount to be created for
Performance entire concession period
Security

Right of
Way • Deemed Performance Security will constitute first charge
(after statutory levies) on an equivalent balance in the Escrow
Financial Account on all accounts due and payable by the Authority
Close New clause

Appropriation of Deemed Performance Security

Termination
• Deemed Performance Security can be appropriated upon
occurrence of Concessionaire default
Others New clause

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 Key Concepts - Concession Agreement

Condition Procurement of the site

Precedent • Prior to the Appointed Date, Authority to provide Right of Way
to 90% of the site to the Concessionaire
Performance Earlier 80%
Security

• Damages payable by the Authority for delay in granting

Right of
Way balance Right of Way @ Rs. 1 per day for every 10 sq. meter
(i.e. Rs. 100 per 1000 sq. meter) or part thereof commencing
Financial from the 91st day of the Appointed Date
Close Earlier Rs. 50 per 1000 sq. meter

Termination

Others

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 Key Concepts - Concession Agreement

Condition Financial Close

Precedent
• Concessionaire shall achieve Financial Close within 180
Performance days, in respect of debt equal to at least 45% of the Total
Security
Project Cost
New requirement
Right of
Way • In the event of delay, it shall be entitled to a further period
not exceeding 185 days subject to payment of damages
Financial Earlier 120 days
Close • The damages shall be paid to the Authority @ 0.05% of
the Performance Security for each day of delay
Earlier 0.1%
Termination

Others

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 Key Concepts - Concession Agreement

Condition Termination for Concessionaire Default

Precedent • In case Concessionaire fails to replenish or provide fresh
Performance Security within a cure period of 15 days
Performance Earlier 30 days
Security

• Concessionaire fails to meet Conditions Precedent or cure

Right of
Way the default (after furnishing fresh Performance Security) even
after cure period of 120 days
Financial Earlier 90 days
Close
Termination for Authority Default
• Authority fails to provide Right of Way, and other statutory
Termination
clearances within a period of 180 days from the Appointed
Date
Others New clause

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 Key Concepts - Concession Agreement

Condition
Precedent
Interest on Termination Payment
Performance • In case of any delay in Termination Payment, the Authority
Security shall pay interest @ Bank Rate + 3%
Earlier rate linked to 10 year G-Sec yield
Right of
Way
Certain Limitations on Termination Payment
• For the purpose of computing Termination Payment, the Debt
Financial
Close Due shall not exceed 85% of the Total Project Cost
New provision

Termination

Others

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 Key Concepts - Concession Agreement

Termination Payment for Concessionaire Default during the Construction

Condition
Precedent Period
• No Termination Payment would be due and payable in case the
Performance expenditure is less than 40% of the Total Project Cost
Security • In case, the expenditure is more than 40% then Debt Due is estimated
after deducting the 40% from the expenditure
Right of New clause
Way

Financial Example
Close
• Total expenditure is 90% of Total Project Cost (TPC)
Termination • Expenditure eligible for computation of Termination payment – 50% of TPC
(90% - 40%)
• Maximum Termination payment - 45% of TPC (90% of 50%)
Others

Additional comfort for lenders/concessionaires

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 Key Concepts - Concession Agreement

Condition Obligation relating to Refinancing

Precedent
• Refinancing is permitted now in whole or part, of the debt due
subject to the condition that repayment shall be completed one
Performance
Security year prior to expiry of the Concession Period
New Clause
Right of
Way
Maintenance during Construction
• In case of default by the Concessionaire in maintaining the road
Financial
Close during construction, damages to be paid @ 0.2% of the
Performance Security each day of delay
Termination New Clause

Others

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Salient Terms of MCA
Primary Security: Project Cash Flows:

 Since, the Project assets are not available as security to lenders; It is

project cash flows being the first layer and mainstay of Lender’s security.

 Cash Flows are monitored through a Trust & Retention Account framework

Security
Interest of Collateral Security – Substitution Rights:
Lenders
Substitution rights are available to Lenders using which lenders can substitute
concessionaire in event of default

Termination Payment:

In case of event of default (Concessionaire/ NHAI/ Force Majeure), it is the

obligation of the counter party to service the debt obligation as stipulated in
MCA.

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 Advantages of the Hybrid Annuity Model

Reduced initial capital outflow for Authority compared to EPC mode

Easier debt servicing by concessionaires during the initial years of project

compared to BOT (Toll) projects

Major Additional comfort to Lenders in case of termination during construction

period.
Advantages of
the Reduced equity investments by developers
Model
Opportunities for IDFs and InvITs for long term investments in the sector
post construction completion with reduced risk perception

Private Sector not required to bear the traffic risk

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Some Questions?
HARISH KANT KAUSHIK
harishkant2007@gmail.com
harishkant@nibmindia.org
+ 91 9819 799 455