While HAM projects, in turn, provide EPC opportunities to developers; both are not replaceable. Unlike EPC projects, the challenge with HAM is that it also involves an equity commitment, at around 10-15%, and the developers have to achieve financial closure to execute the project.
As project awards by the National Highways Authority of India (NHAI) through the hybrid annuity model (HAM) is getting traction, the authority has proposed to tighten the minimum net worth crieria for bidders to ensure that the successful bidder does not falter on achieving financial closure and the project don’t get stuck after they are awarded.
The minimum eligibility criteria for HAM bidders comprises the threshold technical capacity and financial capacity or minimum net worth. The threshold financial capacity is 15% of the estimated project cost at the close of the preceding financial year. The NHAI wants the net worth threshold to be as on the day before the opening of the financial bids.
In a letter to the ministry of road transport and highways (MoRTH), the NHAI has said, “A bidder having certain minimum net worth is eligible to bid for any number of HAM projects. There may be a scenario that a bidder having lower net worth, if awarded multiple HAM projects may face issues in achieving financial close for various such projects at a time.”
“This may adversely affect the project completion and lead to stuck projects. In order to avoid such scenario, the eligibility clause for financial capacity in RFP is proposed to be modified, so as to assess the net worth of the firm as on the day before opening the financial bids by linking it to the balance equity infusion in already awarded projects,” the NHAI said.
The HAM space started crowding mainly after the government reduced the bid-eligibility criteria and made changes in the model concession agreement (MCA) to encourage private participation last year. These measures paved the way for mid-sized players to enter the space.
Their share was around 58% of the HAM awards during the first half of the current fiscal — higher than 33% in FY21. Between FY16, when the HAM route was introduced, and FY20, their share was much lower at only 15%, according to rating agency Crisil.
Also, the steep increase in competition in the engineering procurement and construction (EPC) segment has resulted in bids which are at a substantial discount to NHAI’s base price. As a result, in order to protect the margins and continue building order book, many contractors shifted towards HAM projects.
As a result, after a blip in 2019-20, HAM started ruling the roost again, contributing to more than half of the project awards for the NHAI. Crisil expects of the total 4,500-5,000 km expected to be awarded by the authority this fiscal, 45-55% should be under the HAM mode, another 40-45% under EPC and less than 5% under the build-operate-transfer toll (BOT) mode. HAM had accounted for 54% of the awards last fiscal as well.
While HAM projects, in turn, provide EPC opportunities to developers; both are not replaceable. Unlike EPC projects, the challenge with HAM is that it also involves an equity commitment, at around 10-15%, and the developers have to achieve financial closure to execute the project.
However, if developers take up more HAM projects without adequate funding backup to meet the equity requirements, they are bound to face challenges in achieving financial closure later which could stall or delay the project execution and thereby result in additional penalties or invocation of guarantees.
“To avoid such a situation, NHAI has proposed to amend the net worth criteria wherein the future equity commitments for the under-construction HAM projects will be adjusted from net worth at the time of bidding for new projects. This will help in filtering developers who have already taken up high number of HAM projects – more than what they can chew,” said Icra’s Rajeshwar Burla.
