Mains Daily Question
Jan. 11, 2021
- Explain about the Hybrid Annuity Model (HAM) as a new model of Public Private Partnership in highway construction and discuss how it can solve the problems of the earlier models.
Approach:
- Introduce with how the HAM model was needed in PPP projects
- Explain the problems with earlier EPC and BOT models in financing and risks
- Explain how HAM can solve the earlier problems
- Conclude by noting HAM's success and how other entities are taking up this model
Taking into account the struggle of various types of PPP projects especially in highway construction, the Union Government in 2016 approved hybrid annuity model (HAM) to fast-track highway projects, revive the Public-Private-Partnership (PPP) mode and attract more investments in the sector.
Problems With Earlier PPP Models
- Problems With Financing
- Earlier PPP models included EPC (engineering, procurement and construction), where NHAI pays private players to lay roads, and BOT (build, operate, transfer), where private player financed, built and operated projects and got paid through annuity or toll.
- But both the models were struggling as government didn't have funds for EPC while private players struggled to raise funds under BoT.
- Earlier PPP models included EPC (engineering, procurement and construction), where NHAI pays private players to lay roads, and BOT (build, operate, transfer), where private player financed, built and operated projects and got paid through annuity or toll.
- Risk sharing:
- In BOT model all risks i.e. financial, toll collection and operation & maintenance (O&M) is borne by private sector. These risks put private sector more vulnerable.
- In BOT model all risks i.e. financial, toll collection and operation & maintenance (O&M) is borne by private sector. These risks put private sector more vulnerable.
HAM Model
- Financing
- Hybrid Annuity Model is a mix of the EPC and BOT models. The government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The balance 60 per cent is arranged by the developer, and is recovered as variable annuity amount after the completion of the project from NHAI which collects revenue.
- Essentially, disbursement of funds from the government is done within a stipulated timeframe. Issues with banks on debt disbursement have also been mostly resolved.
- Hybrid Annuity Model is a mix of the EPC and BOT models. The government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The balance 60 per cent is arranged by the developer, and is recovered as variable annuity amount after the completion of the project from NHAI which collects revenue.
- Risk Sharing
- In the new HAM model, a realignment of risk sharing is brought in. The private partner continues to bear the O&M risks, but the financing risk is now shared with government as the government pays 40% during the construction stage. The government also shoulders the responsibility of revenue collection. Hence not one entity takes burden of all risk and hence all are comfortable with this model.
- In the new HAM model, a realignment of risk sharing is brought in. The private partner continues to bear the O&M risks, but the financing risk is now shared with government as the government pays 40% during the construction stage. The government also shoulders the responsibility of revenue collection. Hence not one entity takes burden of all risk and hence all are comfortable with this model.
- Pre-project system:Land acquisition and other issues like clearances have been addressed to a large extent through changes in pre-project systems. So financing risks have also come down substantially.
HAM's success can be seen by the fact that it has become the preferred contract for NHAI, with nearly 50 per cent contracts in FY18 in highway construction awarded under this model. Banks are also benefitting by limiting their exposure to 35 per cent (in HAM projects) compared with 70 per cent in the traditional BOT projects. Based on success of HAM in highway sector, many other entities like National Mission for Clean Ganga (NMCG) are taking up hybrid-annuity based PPP model for sewage treatment plants etc.
