Electric Bus Concession Model Similar to HAM; Counterparty Risk Evaluation Critical

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India Ratings and Research (Ind-Ra) opines the public private partnership model (gross contract model) for running electric buses to gradually gain momentum among state transport undertakings. The central government’s push through the Faster Adoption and Manufacturing of Electric Vehicles in India (FAME) policy and incentives through fund allocations has led to at least 4,580 electric four-wheeler vehicles (including electric buses) operating during FY21.

Rating Criteria Related Considerations: The contract structure of e-mobility projects resembles availability-based concessions such as hybrid annuity model (HAM) based road and waste-water treatment projects. Hence, Ind-Ra would apply “Rating Criteria for Availability-Based Projects” in addition to the master criteria for infrastructure projects. While the operator’s capability is an essential rating consideration, the agency sees the operating risk to be moderate. In the projects under execution, subsidy receipts from the authority has been timely reinforcing the government’s focus on this electric vehicles (EV) sector. The success of the model depends on the predictability and the certainty of income receipts. Given that the concession authority-cum-revenue paying counterparty generally has a moderate to weak credit profile, creation of upfront deposits in the escrow account and average receivable days of the project play a crucial role in assessment of the project’s rating.

Business Model Structure: Project cost involves capital expenditure primarily incurred towards the procurement of electric buses and setting up of charging infrastructure at maintenance depots. Construction costs for developing maintenance depots is not a part of the project cost and the authority shall reimburse construction milestone-linked payments to concessionaire-cum-operators. During the operations & maintenance (O&M) period, the concession grantor is obligated to pay the operator a per kilometre fee (PK fee) for scheduled average bus kilometres per bus in a continuous period of 12 months after achieving commercial operations date (COD; annual assured bus km), as per the deployment plan in Schedule-J of the contract.

E-Bus Concession Framework Differences from Other Infrastructure Sector HAM Models: Ind-Ra has compared the concession framework and listed relative risk assessment.

Figure 1
Comparative Key Project Parameters
Project parameterHAM Projects (Road/Sanitation)Opex Model of Electric Buses (E-Bus)Risk Level of E-Bus Model/ Ind-Ra Comments
Land acquisition (prior to appointed date)·     80% right of way (ROW) for HAM (roads) & 90% ROW for build-operate transfer toll·     100% ROW for HAM (sanitation)·     90% ROW for construction of maintenance depots·     Similar to build-operate transfer toll road projectsRisk Level: MediumDelay is possible in acquiring balance 10% ROW; however material delay in COD is not anticipated due to delay in handover of balance land
Total security deposit during project lifecycle·     3-5% of bid project cost (BPC) for HAM (roads) and 10% of BPC for HAM (sanitation) as performance security·     Typically, valid for full construction period (24 months) for HAM (sanitation) and 12 months from appointed date for HAM (roads)·     No O&M security deposit for HAM (roads) during operations. 5% of BPC available for the entire operations period of 15 years for HAM (sanitation)·     3% of total project cost·     Valid for full contract period of 16 years and prior release shall happen only on termination due to the authority’s defaultRisk Level: LowPerformance security is available for the full contract period. Maintenance of security deposit by the authority during operations phase motivates the operator to perform in line with concession agreement
Minimum escrow balance to be maintained by authority during project lifecycleNil for HAM (roads) HAM (sanitation): Escrow account is pre-funded with forthcoming two construction milestone-linked grant payments during the under-construction stage and forthcoming two years’ annuity payments during the operations stage. Failure to maintain the stipulated balance for consecutive 90 days would be treated as a payment default by the authority·     Minimum escrow balance of at least two months’ estimated fee payable to the operator as a revolving fund maintained by the authority·     Valid for full contract period of 16 yearsRisk Level: MediumState transport entities have a weaker credit profile than central government entities. Hence, regular compliance is an important consideration
Mobilisation advance (MA) & Total project cost (TPC)HAM (roads): 10% of BPC available as MA from authority post appointed date. Interest payable on MA is the Reserve Bank of India-prescribed bank rate, compounded annually HAM (sanitation):10% of BPC available as MA from authority post appointed date. Interest payable on MA is 8% per annum for delay in actual project progress from stipulated milestones·     No mobilisation advance on TPC payable by the authority·     TPC comprises cost for procurement of buses and charging infrastructure, and excludes maintenance depots linked construction costs·     Construction costs of maintenance depots to be reimbursed by the authority in four instalments on completion of 30%, 60%, 80% and 100% of totalRisk Level: MediumAbsence of MA could affect operator’s liquidity. However, subsidy payable to the operator on electric bus purchases, subject to the cap of 40% on acquisition price, shall boost its liquidity
Grant paymentsHAM (roads): Performance-linked grant payments worth 40% of BPC payable in five to 10 instalments HAM (sanitation): Performance-linked grant payments worth 40% of BPC payable in four to eight instalments·     No grant payments on TPC payable by authority·     However, subsidy payable to operator, up to 40% on acquisition of price of electric buses after CODRisk Level: MediumTimeliness of subsidy payments post COD is yet to be a tested factor
Construction periodHAM (roads): Generally, ranges between 24-36 months from the appointed date depending on the complexity of road and other structures HAM (sanitation): Typically, 24 months from effective date, including a trial period of three months·     Scheduled construction completion of maintenance depots is six months from the appointed date·     Project COD linked to the supply of buses to be achieved within 90 days from such depotsRisk Level: LowComplexity of procuring buses from manufacturer is low. However, there is no bonus payable to the operator for early completion unlike roads or sanitation projects
Project cost escalation·     Price index multiple comprising 70% wholesale price index (WPI) and 30% consumer price index is linked to construction grants payable by authority for both HAM (roads) and HAM (sanitation)Inflation costs payable by the authority are generally a pass through to the construction contractor for HAM road projects·     TPC is lowest of: – (i) the capital cost of the project as per financial package; (ii) the actual capital cost of the project upon completion; and (iii) a fixed amount as per concession;·     If WPI increases beyond 6% per annum during construction period till COD, TPC shall be revised subject to mutual consent of the authority and operator·     Maintenance depot construction cost increase due to change in WPI between bid date and appointed date shall be reimbursed by authorityRisk Level: MediumTPC overrun for inflation below 6% needs to be borne by the operator. However, given the short construction period, a material impact on TPC is unlikely
Debt dueAggregate of the following outstanding: -·     Principal amount for funding 60% of BPC in HAM (roads) and 45% of BPC in HAM (sanitation), excluding principal due in past two years prior to termination notice;·     Total interest accrued (excluding penal charges) on principal, except interest due in past one year prior to termination notice;·     Subordinated debt/ quasi-equity included in HAM (roads).For termination payment purposes, debt due shall not exceed beyond 85% of TPC or 51% of BPC in HAM (roads); TPC is 60% of BPCAggregate of the following outstanding: -·     Principal amount for funding TPC, excluding principal due in the past two years prior to termination notice;·     Total interest accrued (excluding penal charges) on principal, except interest due in the past one year prior to termination notice;·     Subordinated debt/ quasi-equity Debt due shall not exceed beyond 70% of TPCRisk Level: MediumDebt due for termination payments in E-bus model is lower than HAM (roads).
Termination compensation due to concessionaire’s default during construction periodHAM (roads): Concessionaire to be paid nil for the first payment milestone. Payment shall be lower of certain percentage of BPC and between 50% to 80% of debt due for balance payment milestones HAM (sanitation): Concessionaire to be paid, an aggregate of pending construction payments for completed milestones and 85% of debt due·     No termination payment on TPC shall be due or payable by authority on account of operator default prior to COD·     For maintenance depots, 75% of construction cost expended by the operator till transfer date shall be paid by the authorityRisk Level: HighCOD delay due to delays in bus procurement from original equipment manufacturers will be primarily borne by the operator, while risk transfer to the manufacturer may happen based on bus purchase contract.
Termination compensation due to authority’s default during construction periodHAM (roads): Concessionaire to be paid, an aggregate of: – (i) lower of debt due and certain percentage of BPC; and (ii) 150% of adjusted equity (inflation-adjusted paid-up share capital) HAM (sanitation): Concessionaire to be paid, an aggregate of: – (i) pending construction payments for completed milestones; (ii) debt due; and (iii) equity infused till termination notice date along with interest at concession stipulated interest rate·     Concessionaire to be paid, an aggregate of debt due and 150% of adjusted equity·     For maintenance depots, 110% of construction cost expended by operator till transfer date shall be paid by the authorityRisk Level: LowOperator is fully covered on debt raised and equity infused in project
Force majeure (FM) costs prior to COD payable by authorityHAM (roads): Payable after appointed date. FM costs include interest on debt due, O&M expenses, increase in construction costs due to inflation and exclude debt repayment obligations HAM (sanitation): Nil prior to COD]FM costs are payable post appointed date. FM costs include interest on debt due, O&M expenses, increase in construction costs due to inflation and exclude loss of income or debt repayment obligationsRisk Level: LowOperator is appropriately covered for interest during construction and project cost overruns after a FM event
Key bid variableHAM (roads) comprises: – (i) BPC and (ii) O&M price for first year after COD HAM (sanitation) comprises: – (i) BPC and (ii) O&M charges for first month after COD; and (iii) guaranteed energy consumption for O&M period·     Bid variable is PK fee payable on annual assured bus km·     Annual assured bus km is also a part of the pre-bid documentRisk Level: Neutral 
O&M payments by authorityHAM (roads): Inflation-linked bid O&M price is paid semi-annually. Total of 30 annuity payments made during operations period of 15 years HAM (sanitation): Inflation-linked O&M charges and power consumption charges for operating plant is paid quarterly. Total of 60 capex annuity payments made during the operations period of 15 years·     No separate stream of revenue payable which is linked to O&M costs incurred by operator.·     PK fee implicitly covers both capex and opex costs for annual assured bus km run by operator·     PK fee is inflation-linked, adjusted bi-annually subject to concession terms·     Delay in payments by authority to operator beyond 30 days of invoice date shall lead to an authority defaultRisk Level: LowRisk depends on fair assessment of technical and financial bid parameters.
Project availability indicatorsHAM (roads): Lane availability, if lower than threshold limit may lead to deductions in annuities by the authority HAM (sanitation): Availability of designed capacity, performance standards of raw sewage and treated water. Deterioration from declared limits in contract shall lead to liquidated damages payable to authority·     Key performance indicators (KPIs) include reliability, operation, punctuality, frequency, safety, upkeep of bus and conformity with industry test specifications·     Above KPIs to be measured quarterly, are largely quantitative and formula is defined in contract·     Penalty is payable to authority for repeated shortfall from stipulated KPIs in a quarterRisk Level: LowDefined metrics to measure daily operator’s performance improves overall efficiency of bus fleet
Limitation to change in ownershipHAM (roads): Concessionaire shall hold at least 51% of total equity till six months from COD HAM (sanitation): Concessionaire shall hold at least 51% of total equity till COD and at least 26% of total equity till three years from CODConcessionaire shall hold at least 51% of total equity till COD and at least 26% of total equity or such lower shareholding permitted by the authority post COD till the balance contract periodRisk Level: LowAlthough other public private partnership models started with similar limitation, on evolution this condition was relaxed and such change favours churn in the industry
Critical termination events during operations periodHAM (roads): Authority default, concessionaire default, force majeure events subsisting for six months in a year HAM (sanitation): Authority default, concessionaire default, FM events subsisting for 120 days unless mutually extended, non-maintenance of two years’ annuities payable by the authority in escrow balance for stipulated days·     Failure of operator to immediately replace post breakdown·     FM events subsisting for 180 days in a year·     Suspension of operator not revoked within 180 days post operator defaultRisk Level: Neutral
Termination compensation due to concessionaire’s default during O&M periodHAM (roads): Concessionaire to be paid 65% of total annuity payments remaining unpaid for during O&M period, including interest till the transfer date HAM (sanitation): Concessionaire to be paid, an aggregate of: – (i) pending construction payments and O&M payments due, as of termination notice date; (ii) 85% of capex annuity payments for the unexpired portion of the O&M period·     Concessionaire to be paid, an aggregate of: – (i) 90% of debt due; (ii) 70% of additional termination payment·     Additional termination payment is depreciated/replacement value of extra assets developed in depot sites and maintenance depots between five and 10 years from COD·     Subsidy received by operator for project implementation shall be deducted from termination amount payableRisk Level: LowCompensation in e-bus model is directly linked to repayment of outstanding debt availed by project whereas termination compensation in the roads and sanitation model is indirectly linked to debt outstanding.
Termination compensation due to authority’s default during O&M periodHAM (roads): Concessionaire to be paid 100% of total annuity payments remaining unpaid for during O&M period, including interest till the transfer date HAM (sanitation): Concessionaire to be paid, an aggregate of: – (i) pending construction payments and O&M payments due, as of termination notice date; (ii) Capex annuity payments for the unexpired portion of the O&M period·     Concessionaire to be paid, an aggregate of: – (i) debt due; (ii) 150% of adjusted equity; and (iii) 115% of additional termination payment.·     Subsidy received by the operator for project implementation shall be deducted from termination amount payableRisk Level: LowOperator is fully covered on debt raised and equity infused in project
FM costs during O&M period payable by authorityHAM (roads): Payable after appointed date. FM costs include interest on debt due, O&M expenses, increase in construction costs due to inflation and exclude debt repayment obligations HAM (sanitation): Payable after COD. FM costs include capex annuity (including interest) and the O&M charges during the FM periodFM costs are payable post appointed date. FM costs include interest on debt due, O&M expenses, increase in construction costs due to inflation and exclude loss of income or debt repayment obligationsRisk Level: MediumOperator is appropriately covered for interest on debt and O&M expenses. However, debt repayments falling during FM period is not covered.
Source: Ind-Ra

Fund Apportionment for Subsidies Payable under FAME: The Department of Heavy Industry (DHI), acting on behalf of Indian government, promotes faster adoption of electric vehicles under the scheme, FAME and approved disbursements worth INR8.95 billion under FAME- Phase 1 for EVs purchased during FY16-FY19. Additionally, DHI has sanctioned a total outlay of INR100 billion under FAME-Phase 2 for propelling demand potential of e-mobility industry during FY19-FY22. Approved subsidy payments towards EV purchases under FAME-Phase 2 comprise 86% of total (INR85.96 billion), and setting up charging infrastructure for EVs constitutes an additional 10% of the total payout (INR10 billion).

Total funding support provided towards the procurement of electric buses under FAME-Phase 2 is INR35.45 billion, i.e. 41% of overall expenditure towards EV purchases while the balance 59% contributes to the acquisition of electric two/ three/ four wheelers. Subsidy payable by DHI per electric bus on its acquisition price (maximum cost of INR20 million) with battery size of roughly 250 kilowatt hours is INR5 million under FAME-Phase 2. Detailed allocation of funds under different heads of FAME-Phase 2 is as below:

Figure 2
Fund Allocation-Year Wise (INR billion)
FY20FY21FY22Total fund requirement
Demand incentive8.2245.8731.8785.96
Charging infrastructure34310
Other opex0.120.130.130.38
Total allocation for FAME-Phase 211.34503596.34
Committed expenditure for FAME-Phase 13.663.66
Grand total155035100
Source: DHI, Ind-Ra

Ecosystem Development for Electric Buses: The electric buses segment is still in the nascent stages of market penetration and is a fraction of the electric two wheelers sold in India, constituting only 0.01%-0.40% of the total e two-wheeler (E2W) sales.

 Figure 3

The drive for boosting the Indian e-mobility market by DHI has improved significantly under FAME-Phase 2 compared to FAME-Phase 1. The total number of electric bus purchases sanctioned under Phase 2 is 7,000 i.e. 16.5x of the purchases approved in Phase 1 (425). About 89% of the total electric bus procurement programme under Phase 2 is towards intra-city movement and balance 10% is towards inter-city movement. Buses which satisfy the required localisation levels and technical eligibility notified under FAME-Phase 2 scheme are only eligible for incentives. The top six states accounting for close to 55% of the total electric bus sanctions under Phase 2 include Maharashtra (1,015), Gujarat (850), Uttar Pradesh (600), Tamil Nadu (525), Karnataka (400) and Delhi (400).

The total charging stations authorised under Phase 2 is 2,877 i.e. 5.5x of sanctioned in Phase 1 (520). About 60% of the total are fast-charging stations and balance 40% are slow-charging stations. The top five states contributing to about 50% of approved charging stations under Phase 2 comprise Maharashtra (317), Tamil Nadu (281), Gujarat (278), Andhra Pradesh (266) and Madhya Pradesh (235).

Demand incentives available to 1.56 million EVs (excluding electric bus) in the form of subsidy payments by DHI under Phase 2 is 5.6x of 0.28 million EVs approved under Phase 1 having similar concessionary purchase price. 

 Figure 4
 
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