FCC

How new HAM criteria puts all on equal footing

2022-08-11

The Hybrid Annuity Model (HAM) has become the backbone of Bharatmala 1 & 2. Around 70 per cent of projects are given on HAM by NHAI. Under HAM, NHAI funds 40 per cent of the construction cost while 60 per cent is funded by the developer with own finance. NHAI makes a payment of 60 per cent of the construction cost along with interest on the outstanding amount (bank rate +3 per cent) and O&M cost over a period of 15 years to the developer, who is required to maintain the road for 15 years. As NHAI takes the responsibility of toll collection, the developer is not exposed to toll risk. Hence,this was a preferred mode for developers.

However,developers have become aggressive and started bidding with a low O&M budget to get a better NPV (net present value). Having realised this,NHAI has suggested changes in HAM biddings. The table below gives a summary of changes in the bidding criteria of NHAI HAM projects.

S. No.

RFP and MCA Condition earlier

RFP and MCA conditions now

as per notice dated May 23, 2022

Bids to be assessed on bid price, where bid price is equal to sum of NPV of ‘bid project cost’ and NPV of ‘O&M cost’ quoted by the bidder

Bids to be assessed on bid project cost criteria

O&M payments during concession period

· First year O&M cost quoted by bidder adjusted for price index multiple + GST to be paid along with the annuities on biannual basis

O&M payments during concession period will be a fixed percentage of the bid project cost quoted by the bidder.

It should be noted that the O&M payment will be adjusted on account of variation in price index. The bid project cost shall be reckoned with reference to amount specified in clause 23.1 – ‘bid project cost’, which shall be adjusted to the extent of change of scope and reduction in scope but shall not include any price adjustments in pursuance of variation of price index.

The above O&M payments shall be inclusive of all taxes.

O&M payment structure

NHAI has announced the following structure for payment of O&M for different types of roads:

Year	Flexible perpetual payment including structures	For rigid pavement with 10-year maintenance period including structures	For standalone bridge/tunnel works
1	No maintenance charges to be paid	No maintenance charges to be paid	No maintenance charges to be paid
2	0.40% of BPC	0.20% of BPC	0.20% of BPC
3	0.40% of BPC	0.20% of BPC	0.20% of BPC
4	0.40% of BPC	0.20% of BPC	0.20% of BPC
5	0.60% of BPC till laying of renewal layer or end of concession period, whichever is earlier	0.40% of BPC	0.20% of BPC
6	2.4% of BPC for renewal layer	0.40% of BPC	0.20% of BPC
7	0.40% of BPC	0.40% of BPC	0.40% of BPC
8	0.40% of BPC	0.40% of BPC	0.40% of BPC
9	0.40% of BPC	0.60% of BPC	0.40% of BPC
10	0.40% of BPC	0.60% of BPC	0.40% of BPC
11	0.60% of BPC till laying of 2^nd renewal layer or end of concession period, whichever is earlier	0.60% of BPC	0.40% of BPC
12	2.4% of BPC for renewal layer[1]	0.60% of BPC	0.40% of BPC
13	0.40% of BPC	0.60% of BPC	0.40% of BPC
14	0.40% of BPC	0.60% of BPC	0.40% of BPC
15	0.40% of BPC	0.60% of BPC	0.40% of BPC

What necessitated the change in bidding criteria?

HAM’s bidding criteria was originally conceptualised as BPC would be akin to the EPC cost of the project and first year O&M quote would be akin to the O&M cost for the project.The NPV of these cashflows would be the lifecycle cost to NHAI for the project.

However, developers started frontloading the lifecycle cost of the project by quoting higher BPC and lower O&M cost vis-à-vis what was actually requiredby them during operations.

This made developers’ returns attractive as they would receive 40 per cent of the BPC upfront during the construction period.

Also, this became part of the bidding strategy of developers as by quoting higher BPC and miniscule O&M, the NPV would be lower than the competition.

Soon, this strategy was adopted by a majority of the developers and most L1 bids received by NHAI had a higher BPC and miniscule O&M.

NHAI feared that this would lead to a shortfall in the O&M budget in an SPV and could impact maintenance in future.

Consequences of the change in bidding criteria
The revised norms will bring uniformity in bidding and put all the participants on an equal footing. What used to be a differentiated bidding strategy for some developers to win bids will actually become a norm and everyone would have to compete on the same parameter. Developers will have to factor in the deficit in O&M payments vis-à-vis the O&M cost + applicable taxes that would be incurred during the operations period and add the NPV of this difference to their bid project cost to protect their desired margins.

About the author: Vijay Agrawal heads Infrastructure and Real Estate Practice at Equirus with more than 25 years of professional experience. He has completed multiple transactions in the infrastructure sector and has advised clients in all sectors with focus on infrastructure and real estate. He has been involved in more than 150 M&A transactions as part of Big four Due Diligence team. He is on Editorial Advisory Board of Construction World Magazine.