Hybrid Annuity Model (HAM)

Existing Investment Models

• At present the following three models are followed by the government while adopting private sector participation.

1. Build-Operate-Transfer Annuity Model: In this model, the government will give money to the private player in installments.
2. Build-Operate-Transfer Toll Model: The private player will build and will then recover his cost by charging toll or user fee.
3. Engineering, Procurement and Construction (EPC)- the cost is completely borne by the government. The participation of the private sector is restricted to the provision of engineering expertise only.

Budget 2015

• It introduced two new types of investment models

1. Hybrid Annuity Model- for the development of highways in Maharashtra, Delhi, West Bengal and Uttar Pradesh. It has been introduced to revive PPP in highway construction. It is a mix of BOT Annuity and EPC Models.
2. Swiss Challenge Method– for the redevelopment of 400 railway stations

Hybrid Annuity Model

• The government has approved the HAM for building roads to fast-track highway projects, revive the Public-Private-Partnership (PPP).
• The main objective of the approval is to revive highway projects in the country by making one more mode of delivery of highway projects.
• There are three types of responsibilities in any investment model

1. Finance- Who will finance the project?
2. O&M- Who will be responsible for the operation and maintenance of the project?
3. Revenue- Who will collect the revenue?

• In the BOT Model, the private sector is responsible for these three factors.
• In the EPC Model, the government is responsible.
• The Hybrid Annuity Model (HAM) has elements of both the BOT and the EPC Model of investment.
• In the HAM:

1. Finance- 60 percent of the project funding will be done by the private sector and 40 percent by the government or the public sector.
2. O&M- The private sector will be responsible for operation & maintenance
3. Revenue- Revenue collection will be done by the government or the public sector. There will be no right of toll collection for the developer.

Financing Explained (in the HAM)

• For example, we have to construct a road. The project cost for constructing a 1 Km road is Rs. 100 (taking into consideration inflation).
• The private party will invest Rs. 60 and the Government will invest Rs. 40
• 40% of the Government’s contribution will be given in five installments during construction (annually).
• When the road gets completed, the government will start collecting toll for 15-20 years and will give 60% of its contribution to the private sector from the money collected as toll. It will be given as a variable annuity amount after the completion of the project depending upon the value of assets created.
• It means that the payment will be made in a fixed amount for a considerable period and then in a variable amount for the remaining period.

Advantages

• By adopting the model, all major stakeholders in the PPP arrangements- the Authority, lender and the developer, concessionaire would have an increased comfort level resulting in revival of the sector through renewed interest of private developers/ investors in highway projects.
• It will facilitate uplifting the sociao-economic condition of the entire nation due to increased connectivity across the length and breadth of the country leading to enhanced economic activity.
• Benefit to the private sector– they will have to contribute less unlike the BOT model where the entire financing had to be done by the private sector. It will now be easier for him to get finance from banks or financial intermediaries. In short, the developer will get enough liquidity and his financial risk will be shared by the government.
• His return will be assured as the Government will pay him the installments.
• The developer is insulated from revenue/traffic risk and the inflation risk, which are not within its control.
• Benefit to the Government– It will pay in installments so its upfront contribution will be lesser than in EPC model.
• Money will be given to the private sector in installments only if there is any visible progress. No money will be given if the project has been stalled.
• The model provides an increased comfort level for the lenders and concessionaires as traffic and inflation risks are taken by the NHAI.
• A rational approach has been adopted for allocation of risks between the PPP partners.

Criticism

• There can be a variation in a developer’s cost estimate.
• There is a need for a separate regulator to resolve disputes between a developer and the NHAI. A Public Contracts (Resolution of Disputes) Bill should be introduced.
• Besides low risk, the developers will also have low returns from the project as the collection of revenue will be done by the government. The developers will only get annual installments.
• The private partner will continue to bear the construction and maintenance risks as in BOT (Toll) projects.