HYBRID ANNUITY PROJECTS

AN OVERVIEW
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

Bid parameter – NPV of (Bid Project Cost + 1st year O&M Cost*)

40% of Project Cost (Construction

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

Hybrid Annuity Project

Toll collection by O&M by

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

Construction Period O&M Period

* Includes Routine Maintenance & Major Maintenance
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

Risk shared in EPC Mode Risk shared in BOT Mode

Type of Risk Party Type of Risk Party
Financing Risk Financing Risk
O & M Risk Government O & M Risk Private
Revenue Risk Revenue Risk

Risk shared in Hybrid Annuity Mode

Type of Risk Party
Financing Risk Shared between Govt and Private
O & M Risk Private
Revenue Risk Government
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

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

Additional comfort to Lenders in case of termination during construction period

Advantages
Reduced equity investments by developers

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

Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

Key Highlights

Concession Period 17.00 years

Construction Period 2.00 years*

Operation Period 15.00 years (fixed)

Bid Parameter NPV of Bid Project Cost + O&M Cost

 Interactions happened between banks and NHAI regarding few issues in the model with respective
suggestions, which are discussed in later part of the presentation

* Varies for different projects

Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

Project Milestones

Milestone Date Capital Cost expended Physical Progress

I 180th day from Appointed Date* 15% 15%

II 400th day from Appointed Date* 44% (>= 70% on physical works) 44%

III 650th day from Appointed Date* 85% 85%

• COD
• Date on which completion/Provisional Certificate is issued
• Provisional Certificate shall be issued after completion of construction works for land given within 180 days of Appointed
Date
• Bonus on early completion
• COD > SCOD by 30 days, Authority pays bonus equal to 0.5% of 60% of Bid Project Cost for every month by which COD
precedes SCOD.
• Payable with 1st Annuity payment

* Varies for different projects

Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

- Cost of Construction
- Interest during Construction
Bid Project Cost - Working Capital
- Physical Contingencies and
- Other Costs, except costs pertaining to variation in Price Index, Change in Law and Change in Scope
Price Index 70% of WPI and 30% of CPI (IW)

For every month occurring after the Appointed Date, the Authority shall compute the variation in Price
Price Index Multiple Index occurring between the Reference Index Date preceding the Bid Date and the Reference Index Date
preceding the date of Invoice, and shall express the latter as a multiple of the former

Completion Cost Performance Security

Physical Progress* Value • 5% of the Bid Project Cost
10% 10% of Bid Project Cost X Applicable PIM • Released after a period of 1 year or 30% of Bid Project
30% 20% of Bid Project Cost X Applicable PIM Cost is expended, whichever is earlier
50% 20% of Bid Project Cost X Applicable PIM • Additional Performance Security in case Bid Project
75% 25% of Bid Project Cost X Applicable PIM Cost is lower than 10% of the Estimated Cost by
Authority
90% 15% of Bid Project Cost X Applicable PIM
• Released upon achievement of Project Milestone III
100% 10% of Bid Project Cost X Applicable PIM
Completion Cost Sum Total of Above

* Calculated on the basis of weightages for different elements as per Annexure – I of Schedule - G
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

CONSTRUCTION PERIOD OPERATION PERIOD

Mobilization Advance Annuity

 Amount: Maximum 10% of Bid Project Cost  Amount: 60% of Completion Cost
 Payment: Two equal installments  30 biannual instalments over 15 years
 First instalment at any time after the
Appointed Date
 Second instalment after 60 days from the
Appointed Date Interest on Annuity
 Rate of Interest: Bank Rate compounded annually  On the reducing balance of 60% of Completion Cost
 Principal Recovery: 4 equal instalments reduced  Interest Rate: Bank Rate plus 3% (Current Bank Rate: 6.75%)
from payments made by Authority  Biannual payment, at the same time as Annuity
 Interest Recovery: 5th instalment after 120 days of
4th instalment

O & M payments
Construction Support
 Lump sum financial support in the form of biannual payments
 Amount: 40% of Bid Project Cost  Computed on the amount quoted by the selected bidder
 5 instalments of 8% each  Each instalment is the product of amount determined and the PIM
 Adjusted for Price Index Multiple
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

CONSTRUCTION PERIOD OPERATION PERIOD

1 CONCESSIONAIRE DEFAULT
Payment Milestone Termination Payment
Authority to make Termination
1 NIL Payment to the Concessionaire
2 50% of Debt Due or 5.25% of Bid Project Cost , whichever is lower equal to 65% of the sum of Annuity
Payments remaining unpaid for and
3 60% of Debt Due or 11.70% of Bid Project Cost , whichever is lower
in respect of the remaining
4 70% of Debt Due or 24.00% of Bid Project Cost , whichever is lower Concession Period, including
5 80% of Debt Due or 32.00% of Bid Project Cost , whichever is lower interest up to the Transfer Date

2 NON-POLITICAL EVENT
Payment Milestone Termination Payment Authority to make Termination
1 90% Debt Due or 1.35% of Bid Project Cost , whichever is lower Payment to the Concessionaire
2 90% Debt Due or 9.45% of Bid Project Cost , whichever is lower
equal to 75% of Annuity Payments
remaining unpaid for and in respect
3 90% Debt Due or 17.55% of Bid Project Cost , whichever is lower
of the remaining Concession Period,
4 90% Debt Due or 30.38% of Bid Project Cost , whichever is lower including interest up to Transfer
5 90% Debt Due or 36.45% of Bid Project Cost , whichever is lower Date

1. Termination payments can cover up to 70% of the bid project cost since they are linked to completion cost which is indexed
2. Lenders can hence provide debt funding to the extent of 70% of the Bid project cost
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

CONSTRUCTION PERIOD OPERATION PERIOD

3 INDIRECT POLITICAL EVENT

Payment Milestone Termination Payment
Authority to make a Termination
1 Debt Due or 1.50% of Bid Project Cost , whichever is lower Payment to the Concessionaire
2 Debt Due or 10.50% of Bid Project Cost , whichever is lower 110% of the equal to 90% of Annuity
Adjusted Payments remaining unpaid for
3 Debt Due or 19.50% of Bid Project Cost , whichever is lower Equity
and in respect of the remaining
4 Debt Due or 33.75% of Bid Project Cost , whichever is lower Concession Period, including
5 Debt Due or 40.50% of Bid Project Cost , whichever is lower interest up to the Transfer Date

4 POLITICAL EVENT / AUTHORITY DEFAULT

Payment Milestone Termination Payment Authority to make Termination
1 Debt Due or 1.50% of Bid Project Cost , whichever is lower Payment to Concessionaire
150% of the equal to sum of Annuity
2 Debt Due or 10.50% of Bid Project Cost , whichever is lower Adjusted Payments remaining unpaid for
Equity
3 Debt Due or 19.50% of Bid Project Cost , whichever is lower and in respect of the remaining
4 Debt Due or 33.75% of Bid Project Cost , whichever is lower Concession Period, including
interest up to the Transfer Date
5 Debt Due or 40.50% of Bid Project Cost , whichever is lower
Hybrid Annuity Model Project Cost Payment Terms
Defects Liability after Termination
• Concessionaire responsible for 120 days post Termination for
all defects and deficiencies
• Obligation of Concessionaire to repair / rectify at its own cost
• 15% of the Annuity Payment due and Payable immediately
before the transfer date to be retained in Escrow Account for
120 days post Termination
• On the basis of inspection by Independent Engineer, larger
amount might be retained for longer period
• Bank Guarantee may be given for the amount specified above
Interest for delay in Termination Payment
• Termination Payment sue and payable within 15 days of a
demand being made
• Interest equal to 3% above the daily average Bank Rate on the
amount of Termination Payment remaining unpaid, provided
that such delay shall not exceed 90 days
Debt Due limitation
• Shall not exceed 85% of the 60% of Bid Project Cost at any time
Termination Payments Issues & Suggestions
Debt Due definition (as per MCA)
Aggregate of the following sums expressed in INR outstanding on the
Transfer Date:
• the principal amount of the debt provided by the Senior Lenders
under the Financing Agreements for financing the Total Project Cost
(the “principal”) but excluding any part of the principal that had
fallen due for repayment two years prior to the Transfer Date
• all accrued interest, financing fees and charges payable under the
Financing Agreements on, or in respect of, the debt referred to in
Sub-clause above until the Transfer Date but excluding (i) any
interest, fees or charges that had fallen due one year prior to the
Transfer Date, (ii) any penal interest or charges payable under the
Financing Agreements to any Senior Lender, and (iii) any pre-
payment charges in relation to accelerated repayment of debt except
where such charges have arisen due to Authority Default; and
• any Subordinated Debt which is included in the Financial Package
and disbursed by lenders for financing the Total Project Cost
provided that if all or any part of the Debt Due is convertible into Equity
at the option of Senior Lenders and/or the Concessionaire, it shall for the
purposes of this Agreement be deemed to be Debt Due even after such
conversion and the principal thereof shall be dealt with as if such
conversion had not been undertaken;
Hybrid Annuity Model Project Cost Payment Terms Termination Payments Issues & Suggestions

# Issue Risk to lenders Recommendation

1 Termination Payment:
Pre-COD:
Termination Payment during
construction period:
 Debt is not covered completely in
case of Non-Political Event and
Concessionaire Default
 No termination payment till 40%
completion of Physical Progress in
case of Concessionaire default
 To arrive at debt due, the part of
principal that had fallen due for
repayment 2 years prior to transfer
date has to be excluded
Pre-COD:
 Completion of 40% Physical Progress would
require almost 50% of Financial Progress or
more, which requires funds to be disbursed by the
lenders. However, in case of termination due to
Concessionaire’s default, there is no termination
payment provision till 40% of Physical Progress is
completed. Also, even after completion of 40% of
physical progress, entire debt outstanding is not
covered under termination payment which would
result in loss to lenders.
 For example, for 59% completion of physical
progress, only 50% of Debt Due is covered.
Pre-COD:
a) Debt Due should mean debt outstanding upon occurrence of
termination event and should be entirely covered at all times during
construction period in all cases of termination
b) In terms of Concessionaire default, the termination payment
provision should be available from 1st milestone of payment of
construction support by NHAI, which is 20% currently or any other
lower first milestone defined later by the Authority
c) After 1st milestone, termination payment should be calculated based
on actual physical progress achieved (pro-rata) and not based on
milestones achieved. Authority should consider termination payment
which would cover entire debt used to finance the actual progress.
d) Definition of Debt Due should not exclude the principal that had
fallen due for repayment 2 years prior to transfer date

Post-COD: Post-COD:
Maximum of 65% of balance unpaid Since the termination payment in case of
Annuity with interest would be paid in Concessionaire default post COD is 65% of balance
case of termination due to unpaid Annuities, the D/E ratio would be limited to
Concessionaire default 70:30 for 60% of the Bid Project Cost for covering the
debt outstanding.
Suggestion to lenders:
Debt financing could be structured in such a way so
as to ensure that the outstanding debt is fully covered
by termination payment during the entire operations
period.
Hybrid Annuity Model Project Cost
# Issue
2 Construction Support linked to
Physical Progress after certification
by IE:
 Financial progress is always more
than Physical progress
 Financial progress and physical
progress certified by IE and LIE
varies primarily on account of soft
costs such as pre-operative expenses
incurred by Concessionaire and
difference in weightages given by IE
to various phases of works.
 Such reconciliation causes delays in
providing funds to the project.
Payment Terms
Risk to lenders
Due to substantial time involved
in IE certification, there is
likelihood of project delays due
to delays in disbursement of
construction support
Termination Payments Issues & Suggestions
Recommendation
NHAI could consider disbursement of construction support installments
pending IE certification to the extent of 80% and balance could be withheld
till the receipt of IE certification and subsequent reconciliation. IE
certification could be done within 15 days of submission of invoice. NHAI to
accept IE certification.
Accordingly, the following modification could be done in MCA in this regard:
“Release of construction support should be based on the following:
a) Payment of 80% of the milestone invoice within 15 days of submission of
the invoice pending IE certification
b) IE certification to be done within 15 days of submission of invoice and
NHAI to accept IE certification
c) Balance payable amount to be paid within 30 days from IE certification”
In case, the recommendation is not acceptable to NHAI, lenders would like to
consider disbursal of loans only after receipt of construction support from
NHAI for each milestone. In this case, NHAI should support by timely
disbursement of envisaged grant as any delay would lead to time & cost
overruns.
Hybrid Annuity Model Project Cost
# Issue
3 Interest on balance annuity payment linked to Bank Rate:
 Interest on Balance Annuity Payment is linked to Bank Rate +
3% (currently 9.75%)*
 Interest is paid monthly to the lenders whereas interest along
with annuities would be paid semi-annually by the Authority
 As compared to Bank Rate, the lending rates undergo
frequent changes based on changing market conditions
4 Right of Way:
 The Authority shall grant vacant access and Right of Way for
at least 80% of the length of the project before Appointed
Date
 Appendix to be provided within 90 days from Appointed Date
with no damages payable
 Construction works for Land given within 180 days from
Appointed Date shall be completed on or before SCOD
 Concern with regards to discontinuous stretch, which affects
construction works, has not been addressed
Payment Terms Termination Payments
Risk to lenders
Bank funding does not have direct
correlation with Bank Rate as Bank Rate
is the rate for availing overnight funds
from RBI and not for meeting long term
obligations.
Current Bank Rate is 6.75%, implying
that the interest on annuity would be
9.75%. Since the MCLR rates of various
banks are in the range of 9.25% - 9.75%,
the effective interest of loans would be
higher on account of credit risk
premium. This would lead to negative
carry on cash flows of the project which
might cause liquidity constraints
Past experience of road projects suggest
that in the absence of physical
possession of land in terms of area
required for construction of at least
80% of the length of the project lead to
cost and time overruns. Some projects
awarded with 3D notified land, and 3G
in process, would delay project
timelines thereby resulting in cost
overrun
Issues & Suggestions
Recommendation
Bank funding does not have direct linkage / correlation with
Bank Rate as Bank Rate is the rate for availing overnight
funds from RBI and not for meeting long term obligations
 Spread to be increased to 5% in case the linkage is
maintained with Bank Rate as declared by RBI
OR
 Average 1-year MCLR of a set of 5 banks (irrespective of
banks participating in financial close) with a spread of
2% (IBA could circulate average rate on monthly basis
and names of the 5 banks for calculation of average rate)
 Only unencumbered contiguous land with 3H in place
shall be considered for the purpose of 80% on Appointed
Date and 3E for balance 20%
 However, 100% land with 3H in place should be
provided within 90 days of Appointed Date
Hybrid Annuity Model Project Cost
# Issue
5 Step-in Rights:
In case both the parties decide to exercise its step
in rights, NHAI shall have the sole right to step in
to the Project agreements. However, Concession
terminates if Authority does not exercise its step-
in rights in 90 days
Payment Terms
Risk to lenders
In case of NHAI exercising its sole step-in
rights, the lenders are at loss as their
outstanding debt would not be covered as
per the provisions of termination payment
Termination Payments Issues & Suggestions
Recommendation
In case NHAI exercises its sole right to step-in or the Concession gets
terminated if the Authority has not acted within 90 days, the Authority
should repay the lenders’ dues in full
THANK YOU
APPENDIX – Annuity Payments
Annuity % Annuity % Annuity %
1 2.10% 11 2.84% 21 3.83%
2 2.17% 12 2.93% 22 3.94%
3 2.24% 13 3.02% 23 4.06%
4 2.31% 14 3.11% 24 4.18%
5 2.38% 15 3.20% 25 4.25%
6 2.45% 16 3.30% 26 4.25%
7 2.52% 17 3.40% 27 4.44%
8 2.60% 18 3.50% 28 4.71%
9 2.68% 19 3.61% 29 4.75%
10 2.76% 20 3.72% 30 4.75%