ICRA: NHAI's decision to descope pending right of way without reducing the construction period is a positive for BoT-HAM developers

BOT (HAM) concessionaires are also eligible for bonus for early completion as per original timelines

This decision makes the process smoother for developers and eliminates any potential disputes

The National Highways Authority of India (NHAI) had issued a standard operating procedure (SOP) pertaining to approach towards de-scoping the pending right of way (RoW) for BoT (HAM) projects. Basis the SOP, immediately after the expiry of the period of appointed date plus 20% of construction period, the pending RoW will be removed from scope of work and bid project cost (BPC) will be revised based on the independent engineer’s assessment of civil cost of reduced scope as per applicable rates on bid date after adjusting for proportion of civil cost in total project cost and ratio of BPC and authority’s base price (refer exhibit below). As per an ICRA note, this augurs well for HAM developers and would make the process less obstructive. In its earlier research release in February 2020 the rating agency had already highlighted the land acquisition related challenges faced by HAM projects resulting in delay in announcement of appointed date as well as provisional completion certificate due to delay in de-scoping. There were operational challenges in implementing automatic de-scoping (as per clause 10.3.4 of concession agreement) due to which the announcement of provisional completion certificate is getting delayed for many under construction HAM projects.

Elaborating further, Rajeshwar Burla, Vice President, Corporate Ratings, ICRA says, “For most of the under-construction HAM projects, the RoW available within the stipulated timelines is in the range of 88-92%. From the authority’s perspective it becomes onerous to de-scope and re-tender the remaining portion to a new contractor because of two reasons – a) pending work is not lucrative enough to attract reputed contractors and b) the cost of completing these would be substantially higher – both because of high overheads for a new contractor and because of the escalation in prices when compared to the cost at which the contract was initially awarded to a HAM concessionaire. As a result, the negotiations on de-scoping gets protracted. In this context, the recent SOP to invariably descope pending ROW and revise the bid project cost immediately after expiry of the period of AD plus 20% of construction period is a positive for HAM developers. Not only does it make the process smoother but also eliminates any potential disputes as uncertainty on pending RoW was the single biggest reason for disputes/ claims in the past.”

Post reduction in scope of work and revised BPC, all payments including advances paid will be adjusted based on revised BPC. No interest will be charged on excess payments released based on original BPC. More importantly, NHAI does not intend to reduce the construction period due to downward revision of scope and BoT (HAM) concessionaires are also eligible for bonus for early completion as per original timelines.

With the de-scoping issue getting resolved, the bigger risk that exists for HAM projects which remained unaddressed is the prevailing low bank rates adversely affecting their overall cash inflows. With the series of downward revisions in the repo rates in recent past, the bank rate reduced to 4.25% (historic low) from around 6.25% at the time when the many of the HAM projects were awarded. The highest bank rate in last two decades was at 10.3%. During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate). Overall, such interest receipts accounts for around 45% of total inflows. Therefore, sustained low interest rate regime is a challenge for operational BoT-HAM projects.

Burla added, “The RBI bank rates are expected to remain at low levels to revive growth and mitigate impact of Covid-19 on the economy. Low bank rate would reduce the overall inflows for a HAM project thereby adversely affecting its debt coverage metrics and returns to the investors. The second problem is interest rate transmission related. On one hand, the transmission of reduced interest rates happens with a lag for the project loan (linked to MCLR of banks). On the other, such transmission is immediate in case of the interest to be paid by the authority (linked to RBI bank rate) on the reducing balance of completion cost.”

Linking inflows to a more representative lending rate like SBI-MCLR / EBR instead of RBI bank rate may help the developers, so that at least the movement in interest rate applicable on inflows matches with the movement in the interest payments on project debt and tackles the issue of delay in transmission of reduced interest rates.

Illustration: Assuming NHAI estimated project cost of Rs. 100 crore of which Rs. 88 crore is civil construction cost and the bid project cost as Rs. 120 crore for which there is a 15% reduction in scope.

Exhibit 1: Illustration on calculation of Total Cost of Reduced Scope
1)	The Independent Engineer would assess the civil cost of the reduced scope, as per the schedule of rates applicable on the bid date (To simplify, assuming plain terrain with uniform cost on per lane km basis, 15%*88 = 13.2)
2)	The civil cost of the reduced scope shall be multiplied by the ratio of estimated project cost divided by civil construction cost estimated by authority to arrive at the estimated cost of reduced Scope (13.2* (100/88) = 15)
3)	The estimated cost of reduced scope shall then be multiplied by the ratio of bid project cost to estimated project cost to arrive at the Total Cost of Reduced Scope (15* (120/100) = 18)
(Source: Ministry of Road Transport and Highways, ICRA research)