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Hybrid Annuity in Infrastructure Sector

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In financial terminology hybrid annuity means that the government makes payment in a fixed amount for a considerable period and then in a variable amount in the remaining period. This hybrid type of payment method is called HAM in the technical parlance.

Hybrid Annuity Model (HAM) has been introduced by the Government to revive PPP (Public Private Partnership) in highway construction in India.

At present, three different models –PPP Annuity, PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government while adopting private sector participation. Launch of the new model is due to many problems encountered as associated with the existing ones. Large number of stalled projects are blocking infrastructure projects and at the same time adding to Non-Performing Assets (NPAs) of the banking system. In this context, the government has introduced Hybrid Annuity Model (HAM) to rejuvenate PPP.

Features of HAM

By features the HAM is a mix between the existing two models – BOT Annuity and EPC. Hence to understand the HAM, the basic features of the existing PPP models are elucidated first.

a) The Build Operate and Transfer (BOT) Annuity Model

Under BOT annuity, a developer builds a highway, operates it for a specified duration and transfers it back to the government. The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a six month basis.

b) BOT Toll Model

In this toll based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection. This toll collection will be over a long period which is nearly 30 years in most cases. There is no government payment to the developer as he earns his money invested from tolls.

c) Engineering, Procurement and Construction (EPC) Model

Under this model, the cost is completely borne by the government. Government invites bids for engineering knowledge from the private players. Procurement of raw material and construction costs are met by the government. The private sector’s participation is minimum and is limited to the provision of engineering expertise. A difficulty of the model is the high financial burden for the government.

The Hybrid Annuity Model (HAM):

In India, the new HAM is a mix of BOT Annuity and EPC models. As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer.

Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.

As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount.

Here, he has to raise the remaining 60% in the form of equity or loans.

There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).

Advantages of HAM:

Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk. Government’s policy is that the HAM will be used in stalled projects where other models are not applicable.

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