Hybrid-Annuity Model

Transport minister Nitin Gadkari is actively promoting his brain-child — the Hybrid-Annuity Model or HAM these days. Introduced in January 2016 to revive investments in road infrastructure projects, HAM has seen good initial success. About 30 highways projects have been awarded under HAM by the National Highway Authority of India (NHAI) at a total cost of about Rs. 28,000 crore. Half the projects awarded in 2016-17 were under HAM.

What is HAM?

As the name suggests, HAM’s a hybrid — a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. Under the EPC model, NHAI pays private players to lay roads. The private player has no role in the road’s ownership, toll collection or maintenance (it is taken care of by the government). Under the BOT model though, private players have an active role — they build, operate and maintain the road for a specified number of years — say 10-15 years — before transferring the asset back to the government.

Under BOT, the private player arranged all the finances for the project, while collecting toll revenue or annuity fee from the Government, as agreed. The annuity fee arrangement is known as BOT-Annuity; essentially, the toll revenue risk is taken by the government, while the private player is paid a pre-fixed annuity for construction and maintenance of roads.

Now, HAM combines EPC (40 per cent) and BOT-Annuity (60 per cent). On behalf of the government, NHAI releases 40 per cent of the total project cost. It is given in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. Here, the developer usually invests not more than 20-25 per cent of the project cost (as against 40 percent or more before), while the remaining is raised as debt.

Importance of HAM

HAM arose out of a need to have a better financial mechanism for road development. The BOT model ran into roadblocks with private players not quite forthcoming to invest. First of all, the private player had to fully arrange for its finances — be it through equity contribution or debt. NPA-riddled banks were becoming wary of lending to these projects. Also, if the compensation structure didn’t involve a fixed compensation (such as the annuity), developers had to take on the entire risk of low passenger traffic. In the past, many assumptions on traffic had gone awry affecting returns Now, they are unwilling to commit large sums of money in such models.

HAM is a good trade-off, spreading the risk between developers and the Government. Here, the government pitches in to finance 40 per cent of the project cost — a sort of viability-gap funding. This helps cut the overall debt and improves project returns. The annuity payment structure means that the developers aren’t taking ‘traffic risk’. From the Government’s perspective, it gets an opportunity to flag off road projects by investing a portion of the project cost. While it does take the traffic risk, it also earns better social returns by way of access and convenience to daily commuters.

Infra investments are key for economic growth, something all of us are rooting for. So, it’s important that these projects take off — HAM a big help here.

Also, more and better roads mean smoother rides and less traffic congestion. HAM projects are also being tested in urban infra developments such as metro rail projects — again, a leg-up for faster commuting.

Please follow and like us:

Leave a Reply

Your email address will not be published. Required fields are marked *