All you need to know about HYBRID ANNUITY MODEL (HAM)

  • The union government approved the hybrid annuity model for building national highways, paving the way for construction of 28 projects worth Rs. 36,000 crore this fiscal year.highway-road-300x237
  • The move will speed up the construction of roads in the country by renewing interest of private developers in highway projects as the risk will be distributed between the government and the private players.
  • The government plans to build 28 national highway projects worth Rs.36,000 crore this fiscal year
  • Under the public-private partnership (PPP) model, the government will invest 40 per cent of the construction cost for building highways and the balance will come from the private developer. The government will invest money in five equal instalments based on the targeted completion of the road project.
  • The private developer will recover his investment from the government by receiving annuity payments over a period of 15 years
  • Under this model, the highway toll tax will be collected by the government unlike the build, operate and transfer (BOT) toll model where the private sector collects it.
  • So, there is no revenue or traffic risk on the part of the developer
  • It is a fairly sensible risk-sharing model because it requires the private sector to focus on areas which bring in efficiency mainly in capital cost, project completion time and quality. This model will bring in long-term infrastructure funds like pension funds into the sector
  • A government official said this model will double the speed of highway construction in the country as the government will no longer will be dependent on its limited financial resources and the expertise of private sector will be utilised to operate and maintain the roads.
  • In the next two fiscal years, the government will build more than 5,000 km of national highways based on the hybrid annuity model
  • In the present fiscal year, 1,000 km national highway projects were awarded through the BOT model – where a private operator funds the project, operates it for a period and transfers it back to the government – and 3,000 km through the engineering, procurement and construction (EPC) model in which the government pays the contractor a sum to build the project.
  • Build–operate–transfer

UNDERSTANDING HYBRID ANNUITY MODEL (HAM)

In India, road projects are awarded via one of the three models :

  1. Build-Operate-Transfer (BOT)-TOLL
  2. BOT-ANNUITY
  3. Engineering, procurement and construction (EPC)

The first two BOT-TOLL AND BOT –ANNUITY are PPP model while EPC is not a PPP model.

Build-Operate-Transfer (BOT)-TOLL

  • This was one of the earliest models of PPP used for road construction.
  • The private party is selected to build, maintain and operate the road based on the fact that which private bidder offered maximum sharing of toll revenue to the government.
  • Here, all the risks- land acquisition and compensation risk, construction risk (i.e risk associated with cost of project), traffic risk and commercial risk lies with the private party.
  • The private party is dependent on toll for its revenues.
  • The government is only responsible for regulatory clearances.

Build-Operate-Transfer (BOT) ANNUITY

  • This model was brought in to reduce risk for private players so as to attract them for PPP projects (as the previous BOT-TOLL model was happening to be an unviable project for many road projects due to excessive risk involved, thus, forcing private players to shy from bidding in road PPP projects).
  • In this model, the private player build, maintain and operate the road projects while government pays each year (annually) the private player a fixed amount of annuity for the term of contract.
  • The private party recovers all the costs which it incurred for building, maintaining and operating the road project from the annual annuity amount paid by the government.
  • It is obvious that there is no commercial and traffic risk to the private party as was the case with BOT- TOLL model. HOWEVER, risk associated with cost of project remains. And it goes without saying that the government selects that private player (in competitive bidding) who asks for minimum annual annuity from the government for the project.

Engineering, procurement and construction (EPC) MODEL

  • From year 2010 and more so after year 2013/2014, government failed to attract private players for road projects even under BOT-ANNUITY model.
  • So, EPC model was brought in, where all (100%) money or cost to build the road is provided by the government including that for land acquisition and rehabilitation of people affected by project.
  • Private developers will only design and build fixed length of stretches and leave after completing their part of work handing the road to the government, which then maintains and operates the road by collecting toll or otherwise.
  • The contract for building road is given to that private player who offers to build it at lowest price while simultaneously guaranteeing the quality desired.
  • Quite clearly, the risk to private player in this model is minimum or evil nil as it doesn’t need to even bother about the finances for the project. On the other hand, forget all other risks like land acquisition, compensation, commercial, traffic, security etc, which is borne by government- the model makes the government arrange for even financing the road projects.
  • So, in a sense, EPC MODEL is a simple contract which a government gives to a private player for getting a  work done efficiently and so technically speaking, the EPC MODEL can’t be called a PPP MODEL.

NOW WHY HYBRID ANNUITY MODEL?

  • As explained above, the EPC model was putting lot of strain to the the government for financing road projects.
  • The model was defeating all grand plans of government to bring a substantial part of financing of road projects from private sector. T
  • he precarious situation of government finances with mounting subsidy bill and fiscal deficit coupled with the necessity of quickly building roads and highways, caused the realization of one thing to the government- that the EPC MODEL is unsustainable and private players needed to be attracted to some new and innovative PPP model. This is where HYBRID ANNUITY MODEL (HAM) came in.

WHAT IS HYBRID ANNUITY MODEL?

  • The HAM is a mix EPC and BOT- ANNUITY model, with the government and the private companies sharing the total project cost in the ratio of 40:60 respectively.
  • Apart from 60% project cost, the private player will also build the road and on completion will hand it over to the government.
  • The government shoulders the responsibility of revenue collection (by toll). The government will then pay the fixed amount of annuity annually to the private player for the defined period (10 or 20 years) as per the contract.
  • The government will select that private player (in competitive bidding) who asks for minimum annuity from the government.

Benefit: HAM is a kind of win- win situation for both private players and government. The government has reduced responsibility for arranging for cost of project (only 40%, while in EPC it was 100%). The private player has to arrange for only 60% of project cost (in BOT- ANNUITY, it was 100%, unless government gives viability gap funding, VGF of 20%; nevertheless it was minimum 80%). Moreover all regulatory clearances risk, compensation risk, commercial risk and traffic risk is borne by government, so risk for private sector is also minimal.

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