Hybrid Annuity Model (HAM) of Hybrid Public-Private Partnership Projects: Contractual, Financing, Tax and Accounting Discussions (Management for Professionals)

This book analyses several aspects of Hybrid Annuity Model (HAM), a form of hybrid public-private partnership (PPP) for development of roads sector in India. The book covers contractual, financing, taxation and accounting aspects of the HAM based PPP projects in India and provides a complete multi-dimensional view for readers. It is a comprehensive guide for multiple stakeholders involved in the development of infrastructure projects in developing economies across globe. The book is authored by professionals having hands-on advisory experience for HAM PPP projects in India. Given that these are long-term concession agreements (around 15 years), there are inherent complications and the authors have tried to provide clarity on practical issues. The book adopts a novel case-study approach. Based on detailed financial and commercial assumptions for a road project in India, the authors have used around 100 numerical illustrations to provide a quantitative and qualitative understanding for readers. Another highlight of the book is use of international case-studies to provide key learnings in areas of project preparation and structuring for such hybrid PPP models. The risk allocation framework is also contrasted with the HAM PPP model to highlight the key differences. The international case studies have been selected from transport and water sector to illustrate the applicability of hybrid PPPs across multiple sectors to support sustainable infrastructure development. The target audience for this book include private sector developers, government agencies, deal practitioners, advisors, researchers and academia . This book will also serve as a useful guide for commercial lenders, development finance institutions (DFIs) and institutional investors who are looking to finance such infrastructure projects in the long term. Foreword 6 Preface 8 Contents 11 About the Authors 16 Acronyms 17 List of Figures 19 List of Tables 20 Part IIntroduction 22 1 Evolution of Hybrid PPPs 23 1.1 Evolution of Hybrid Annuity Model (HAM) in India 24 1.2 Key Principals—Hybrid Annuity Model (HAM) 27 References 27 2 Hybrid Annuity Model (HAM)—Timeline 29 2.1 Key Circulars/Notifications 29 References 29 Part IIHybrid Annuity Model (HAM) for Roads Sector, India 45 3 Contractual Structure and Risk Allocation Framework 46 3.1 Contractual Structure 46 3.2 Risk Allocation Framework 50 Reference 50 4 Success of HAM in the Indian Context 55 4.1 HAM as Preferred PPP Model 55 4.2 HAM Projects Awarded—A Quantitative Analysis 56 4.3 Key Players/Stakeholders 57 4.4 HAM Projects Awarded—List of Projects 58 References 58 5 Project Finance and Secondary Market Transactions 84 5.1 Project Finance—Introduction 84 5.1.1 Special Purpose Vehicle (SPV) 84 5.1.2 Lender Due-Diligence Process 85 5.2 Financial Close for HAM Based Road PPP Projects in India 86 5.2.1 The Positives 86 5.2.2 The Hurdles 86 5.2.3 Updates to Model Concession Agreement in November 20 87 5.2.4 Commercial Banks 87 5.2.5 Development Finance Institutions (DFIs) 88 5.3 Emerging Trend—Acquisitions/Secondary Market Transactions 91 5.3.1 Recent Transactions 92 5.3.2 Profile of Major Investors 94 Part III360° Review of Hybrid Annuity Model (HAM) 96 6 Case Study—Project Highway 97 6.1 Introduction 97 6.2 Key Assumptions—Project Highway 98 7 Contract Review—Model Concession Agreement (MCA) 104 7.1 Model Concession Agreement (MCA)—Introduction 105 7.2 Development and Operations 107 7.3 Financial Covenants 113 7.4 Force Majeure and Termination 123 7.5 Changes to Model Concession Agreement (MCA)—June 22 Update 128 7.5.1 Changes in Bidding Process 129 7.5.2 Changes in O&M Payments 129 8 Tax Review—Indirect Taxes—GST 137 8.1 Project Highway Case Study—Summary 137 8.2 Levy and Exemption of GST 139 8.2.1 Levy of GST 139 8.2.2 Exemption from GST 140 8.3 Taxability of Milestone Payments Received During Construction 140 8.3.1 Meaning of Works Contract 140 8.3.2 Composite Supply of Works Contract Treated as Supply of Services 141 8.3.3 Rate of Tax 141 8.3.4 Time of Supply in Respect of Milestones Payment Received by Concessionaire 143 8.3.5 Value of Taxable Supply 146 8.4 Taxability of Mobilization Advance 147 8.5 Taxability of Operation and Maintenance Payments 149 8.5.1 Rate of Tax 150 8.5.2 Time of Supply 151 8.6 Taxability of Annuity Payments During Operation Period 152 8.6.1 Government Notifications and Recommendations of GST Council 152 8.6.2 Importance/Relevance of Recommendations of GST Council 155 8.6.3 Case Laws 157 8.6.4 Taxability of Interest on Annuity Payments During Operations 160 8.6.5 Later Developments in Respect of the Taxability of Annuity Payments Made by NHAI in Respect of Construction of Road 161 8.6.6 NHAI Circular Post the 43rd Meeting of GST Council 167 8.7 Refund on Account of Inverted Duty Structure 169 8.7.1 Introduction 169 8.7.2 Construction and Maintenance of Roads—HAM Based PPP Contracts 170 8.7.3 Notification No. 15/2017-CT(Rate) Dated 28 June 2017 171 8.7.4 Conclusion 178 8.7.5 Formula for Claiming Refund of Unutilized ITC in Case of Inverted Duty Structure 178 9 Tax Review—Direct Tax 181 9.1 Project Highway Case Study—Summary 181 9.2 Section 43CB of the IT Act 183 9.3 Method of Accounting—Section 145 of the IT Act 185 9.4 Income Computation and Disclosure Standard III (ICDS III)—Construction Contracts 188 9.4.1 Scope 188 9.4.2 Combining and Segmenting Construction Contracts 190 9.5 Meaning of Contract Cost and Contract Revenue 193 9.5.1 Contract Cost 193 9.5.2 Contract Revenue 196 9.5.3 Recognition of Contract Revenue and Expense 200 9.5.4 Changes in Estimates 203 9.5.5 Disclosures 204 9.5.6 Treatment of Borrowing Costs 206 9.6 Income Computation and Disclosure Standard IV (ICDS IV)—Revenue Recognition 207 9.6.1 Scope 207 9.6.2 Recognition of Revenue 208 9.7 Applicable Rate of Income Tax 208 9.7.1 Tax Rates 208 9.7.2 Optional Rate of Tax—Subject to Fulfillment of Conditions 209 9.7.3 Minimum Alternative Tax 210 9.7.4 Exercise of Option 211 10 Accounting Review—Ind AS and Revenue Recognition 213 10.1 Project Highway Case Study—Summary 213 10.2 Applicability of Indian Accounting Standards 215 10.3 Ind AS 115: Revenue from Contracts with Customer 218 10.3.1 Introduction 218 10.3.2 Annexure D of Ind AS 115 218 10.4 Five (5) Step Model for Applying Ind AS 115 220 10.4.1 Revenue Recognition in Terms of Ind AS 115 220 10.4.2 Step I: Identify the Contract with the Customer 221 10.4.3 Step II: Identify the Performance Obligations 223 10.4.4 Step III: Determine the ‘Transaction Price’ 228 10.4.5 Step IV: Allocate the Transaction Price to the Performance Obligations 235 10.4.6 Step V: Recognize Revenue as or When Performance Obligations are Satisfied 239 10.5 Financial Asset—HAM Based PPP Projects 249 10.5.1 Background 249 10.5.2 Recognition of Financial Asset 250 10.5.3 Measurement of Financial Asset 252 10.6 Contract Asset and Contract Liability—HAM Based PPP Projects 253 10.6.1 Contract Asset 254 10.6.2 Contract Liability 255 Part IVInternational Experience of Hybrid PPPs 260 11 Success of Hybrid PPPs 261 11.1 Hybrid PPP approaches 261 11.2 International Case Studies—Introduction 262 References 262 12 Ireland—N1/M1 Dundalk Bypass 264 12.1 N1/M1 Dundalk Bypass—Project Information 265 12.1.1 Introduction 265 12.1.2 Key Features of the Project 265 12.2 Project Structure 265 12.3 Risk Allocation 267 12.4 Key Learnings 271 References 271 13 Philippines—Clark International Airport 273 13.1 Clark International Airport—Project Information 274 13.1.1 Introduction 274 13.1.2 Key Features of the Project 275 13.2 Project Structure 275 13.3 Risk Allocation 276 13.4 Key Learnings 280 References 280 14 UK—Thames Tideway Tunnel 281 14.1 Thames Tideway Tunnel—Project Information 281 14.1.1 Introduction 281 14.2 Project Structure 282 14.3 Risk Allocation 283 14.4 Key Learnings 288 References 288