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The Hybrid Annuity Model

The Hybrid Annuity Model

Recently, CCEA (Cabinet Committee of Economic Affairs) has given an approval on the hybrid annuity model. Hybrid annuity model came into picture to divide the financial risk between the Government Authorities and the builders. This model applies to the construction of public roads or highways or big projects for public interest initiated by the government. This comes under the Public Private Partnership (PPP) Scheme where the government ties up with private players in order to share the finances. Annuity is basically a mode of payment where payment is made into fixed installments after fixed time durations. Basically if we talk about the past, three models were into picture- Build Operate and Transfer Annuity Model (BOT), BOT Toll Model and EPC Model.

A brief about all these models is as follows:

  1. BOT ANNUITY MODEL: Under this model the developer builds the highway, operates it for a specified duration and then hand it over to the government. The payment is released after the highway comes into commercial use and is done on six month basis.
  2. BOT Toll Model: Under this model after constructing the highway, the developer gets to collect toll on the highway for nearly 30 years. This is done in lieu of the payment that has to be done.
  3. EPC (Engineering, Procurement and Construction) Model: Under this model the government takes care of the finances and invites tenders from developers. These tenders do not involve financial intervention of developers but they are to seek the help of engineering expertise from the developers.

This was a brief about the models and it would be easy enough to understand the HAM (Hybrid Annuity model) now. Hybrid annuity involves payments made in fixed annuity installments for some period and rest amount as variable annuity i.e variable amounts for another period of time.

This concept has been recently If we look at the equation to represent the Model it would be represented as HAM = BOT Annuity+ EPC which means that the HAM is a combination of BOT Annuity Model and EPC model. First 40% of the entire amount will be paid as five year annuity installment and the rest 60% would be paid as variable annuity after the completion of the project taking into consideration the value of assets transferred.

This has given NHAI (National Highway Authorities of India) the full charge of all the highways as no developer will be getting the highways for toll collection. The government would collect the toll and pay the 60% in varied installments. This will be a relief to the government and will also bring the contractor into picture that has the expertise but has struggled to be a part of the highway concession due to lack of capability of deploying huge finances. This can also mean that there will be speedy completion of projects from now on as the developers now will focus only on the completion of the project rather than luring for the land to their custody and collect heavy tolls. They will also fear the rise of the price of raw materials which would increase their investment. This model’s low risk attribute can also attract international contractors to invest in Highway projects in India and hence would be a good sign.

This is all about HAM and the fact that it will bring in a change in Highway Construction activities. This will benefit the government largely as we have seen but the only issue can be availability of the financials which is always prevailing when it comes to the Indian Government.