This move comes as part of a slew of measures by the authority to encourage participation by the road developers, despite a stressed financial environment
In a bid to accelerate the pace of highway construction and assist the road sector companies, the National Highways Authority of India (NHAI) has been making payment of mobilisation advances to developers for hybrid annuity model (HAM) projects too. Earlier, this was limited only to engineering, procurement and construction (EPC) projects.
This move comes as part of a slew of measures by the authority to encourage participation by the road developers, despite a stressed financial environment. The government had earlier introduced project bids under the HAM due to poor response for public-private partnership (PPP) projects. This was followed by a release of 75% of 'payout amount' against bank guarantee for arbitration award cases under litigation.
The HAM financial structure was introduced to rejuvenate the road sector and lessen the equity burden on the already stressed developers. With even HAM projects facing certain financial hurdles such as lack of financial closure and aggressive bids, NHAI initiated a move to provide initial funds to mobilise and commence works.
Construction funding by the government under HAM projects accounts for 40% of the total cost and is released by NHAI in five tranches linked to the milestones of 20% of the project work, while the balance 60% is arranged by the concessionaire.
The developer would fund not more than 25% of the non-authority component of 60%, which necessitates raising debt. Therefore, the equity portion is narrowed to 15% of the project cost against the earlier set pattern of 20% or 25%.
According to India Research and Ratings (Ind-Ra) agency, one of the clauses in the HAM concession agreement "delineates a provision to grant 10% of the project cost as a mobilisation advance to the concessionaire. To avail this facility, the concessionaire has to provide a bank guarantee for a value of 110% of the mobilisation advance to the authority. This will be set off proportionately against the construction period annuities. Although the net equity injection is only in the range of 2%-5%, the non-availability of funds is unlikely to hinder the construction progress."
"There is a huge cost involved to establish and to mobilise at the implementation site. The mobilisation cost itself is around 10-12%, be it setting up workforce camps, getting machinery, foundations, etc," said Satish Parakh, Managing Director of Ashoka Buildcon, who has two HAM highway projects. This is where the advance payment plays an important role.
"Initial 5% of the mobilisation advance is released in the first month of the project award and the rest 5% is post-establishment of camps," added Parakh.
For road developers, by the time the project implementation is 80-90% ready, the mobilisation advance gets recovered. Thereby, helping in giving a push to commence ground work.
"Of the 27 HAM projects bid up to December 2016, finances have been tied up for 60%. Lenders wary of funding HAM projects have gradually become accustomed to the contract structure especially the equity light model. Another 16 projects awarded later are yet to achieve financial closure," said Ind-Ra's statement last week.
REMOVING HURDLES
- Earlier, the mobilisation advances were limited only to EPC projects
- Mobilisation refers to a preconstruction and preparatory work expenses
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